If shares in Imperial Tobacco continue to trail those of BAT — down 10 per cent this year against its larger rival — there was little to explain that drag in yesterday’s third-quarter update.

Trading remains very much on track, the integration of Altadis — the maker of Gauloises bought for €12 billion two years ago — is proceeding to plan and working capital savings mean that this year’s cashflow should comfortably exceed operating profits.

Most encouragingly, sales volumes in Imperial’s biggest Western European markets continue to improve. The UK remains the company’s most important territory, and volumes of duty-paid cigarettes were down a modest 1 per cent, against the mid-single digit declines that were previously the norm.

True, the situation is beginning to improve after the introduction of the 2007 smoking ban in England and Wales. But tougher economic times also seem to suit it. Imperial has greater exposure to so-called “value” brands than most of its peers — they account for nearly half its revenues — meaning it has been able to benefit from smokers “trading down”, from regular to lower-priced cigarettes, such as its JPS Silver range, and from cigarettes to roll-your-own (it owns Golden Virginia and Drum, the two biggest fine-cut tobacco brands — where volumes are up 15 per cent — as well as Rizla cigarette papers).

Further, a reduction in Britons travelling abroad has boosted domestic duty-paid volumes at the expense of UK brands usually sold overseas. Sharp duty rises in the Irish Republic in October and April have pushed sales into Northern Ireland, where Imperial’s operations are more profitable than south of the border.

Not all was positive. Volumes in Eastern Europe, particularly Poland and the Czech Republic, remain weak. Elsewhere, clear trading patterns in the US — where Imperial gained a presence two years ago through Commonwealth Brands — are still difficult to discern after the rise in federal excise taxes in April that sent the price of an average pack of cigarettes up by 25 per cent.

The lingering strain from Altadis on Imperial’s balance sheet is less of a concern after June’s £1.5 billion of bond issues. Strong cash generation means that gearing should steadily fall. Shares are vulnerable to a shift out of safe-haven stocks to cyclical alternatives. But at £16.60, or ten times current-year earnings —against its sector’s 12 times — and yielding a solid 4.3 per cent, they should be tucked away for the long term.

Kingfisher

The seven-step turnaround plan unveiled last year by Ian Cheshire, Kingfisher’s chief executive, made no mention of the weather. But the boost to the DIY retailer’s sales from a warm spring and early summer is hard to ignore.

Like-for-like revenues at its B&Q chain rose 0.7 per cent in the ten weeks to July 11 — far outstripping forecasts of a 3.5 per cent fall and providing the second consecutive quarter of rising sales after more than two years of declines. The biggest fillip came from seasonal goods, such as barbecues and garden furniture, which fell by only 2 per cent, against forecast double-digit declines given last year’s strong comparatives. Non-seasonal ranges also provided support. Sales here were flat, having been down 2 per cent in the previous three months. Recession provides part of the answer: an austerity-induced return to DIY, under which householders are not only spending more time at home and in the garden, but also looking to save money by doing some jobs themselves rather than seeking professional help. The demise of MFI has also come to its aid. This is evident in B&Q’s rising market share of fittings for kitchens and bathrooms. With second-quarter sales in Kingfisher’s operations in France and Poland also beating expectations, full-year profit forecasts were pushed up by about 7 per cent to £415 million — making the £660 million targeted for 2011-12 under its private-equity style bonus scheme increasingly less fanciful.

China remains a drag but the full effect of rationalisation has yet to feed through and start-up losses from Castorama in Russia continue to fall. At 209½p, or 16 times earnings, the shares are at a two-year high — but recovery has further to run. Buy on weakness.

Colt Telecom

Colt Telecom has been at a canter: the metropolitan fibre network operator’s shares have gained 86 per cent since the turn of the year. But its stride was broken yesterday by weaker than expected second-quarter sales: down 2 per cent on an underlying basis, against a 4.5 per cent rise in the previous three months. The shares fell nearly 5 per cent in response.

But in a margin-pressured business such as telecoms, the bottom line is more important than the top and this continues to move in the right direction: operating profits rose 3 per cent to €79.1 million (£68.1 million). Whereas Colt’s focus was once to fill its expanding pan-European network with traffic of any type, it has spent the past few years shifting from low-margin voice services to higher- margin data and managed services: which now account for 60 per cent of sales, against 40 per cent three years ago. Cost-savings provided by managed services — whereby customers use Colt’s IT infrastructure rather than upgrade their own — should also provide protection from recession: revenues here grew 29 per cent in the second quarter.

After February’s €201 million fundraising, its balance sheet has never been in better shape, boasting net cash of €243 million. That strength and rising cashflow explain why it is contemplating acquisitions for the first time in its 17-year history. But at 119½p, or nine times next year’s earnings on FinnCap’s estimates, the shares are no longer cheap — and, unlike those of BT, do not come with a dividend. Pass.

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