Investment Column: Imperial backers can breathe more easily

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Our view: Buy

Share price: 1,925p (+32p)

Imperial Tobacco's shares have had a pretty rough time in recent months. Sentiment buckled amid concerns about heavy promotional activity in the US, disappointing cigarette volumes over the nine months to June and, given the well-publicised drive towards fiscal tightening in the UK and across Europe, the outlook for vice taxes.

The result was that Imperial went from above 2,100p at the beginning of March to around 1,900p at the end of last week. The weakness was such that, just days ago, Morgan Stanley went so far as so label Imperial the cheapest stock in global tobacco.

But yesterday's full-year trading update could mark a turning point, in our view.

The cigarette maker indicated that it had seen no further deterioration in volumes over its fourth quarter, soothing nerves among analysts and investors alike.

There were no ugly surprises and, though the FTSE 100 fell, Imperial's stock went up. The update should help shift the focus to company's strengths. Next week's investor event should also help drive interest in the shares, which remain far too cheap.

Indeed, on Royal Bank of Scotland's numbers, Imperial, which has continued to lag behind peers in recent months, is trading on multiples of under 11 times forecast earnings for this year.

That figure falls below 10 times on the broker's estimates for next year, and then to nearly nine times on the bets for 2012. The forecast yield, on the other hand, goes from 4.4 per cent for this year to nearly 5 per cent next year and then to 5.5 per cent for 2012.

The valuation gap is especially odd given Imperial's defensive characteristics, which should surely be desirable given what remains a fairly grim macroeconomic backdrop.

It doesn't happen very often, but the market has got this one wrong – very wrong. Buy.

Gulf Keystone Petroleum

Our view: Buy

Share price: 147.5p (-8.25p)

Gulf Keystone talks about Kurdistan when referring to its operations in Northern Iraq – perhaps that's understandable given that the peaceniks argue the real reason we went to war in Iraq in 2003 was to get our hands on the oil there.

And clearly there is plenty of it. Investors in the oil group have had a splendid few months, seeing the stock jump by more than 85 per cent, after Gulf hailed finds at its Shaikan block as transformational. The company is hoping to extract as much as 10,000 barrels a day from the site, and confirmed the estimates in yesterday's operational update. There is no dividend, as one might expect from a company at Gulf Keystone's stage of development, but we would be confident that the shares will make sufficient gains.

A number of analysts have murmured that the stock is getting pricy after its leaps since July. Indeed, the experts at Evolution Securities said in recent note that, "the newsflow over the past three months has been good but in our view not sufficiently good to warrant the strong rebound that has occurred", they said. Still, the broker raised has its target price.

The shares may not jump forward as they have in recent months, but we still believe investors will make money. Buy.

Burst Media

Our view: Sell

Share price: 5p (unchanged)

Burst Media, a US online advertising sales group, has heard a few popping sounds itself over the summer, especially after it was forced to warn on profits. The company has been having a few problems at Giant Realm, an acquisition made to target a younger audience, which caused the shares to drop almost 30 per cent when it disclosed performance issues in July.

The group revealed yesterday that the "loss of business momentum" at Giant Realm meant its losses had widened in the first half of 2010 to $2.3m, from $0.7m. Another acquisition – of OTP which has been renamed Burst Media UK – has also struggled.

Life on the public markets has not always been easy for Burst, as it warned on revenues just months after listing in 2006 and has never since been close to its 82p placing price.

And things are not looking particularly great for the future. Despite improvement at Giant Realm, Burst admitted sales growth slowed during the first two months of the second half.

Altium Capital believes it will have to have a strong final quarter to hit full-year expectations, and may hit profit next year, putting it on a price of two times full-year 2011 earnings. We recommend staying away. Sell.