This is part one of a two part series on the company. Part one is an overview of Imperial and its operations, part two will look at the company’s valuation and future prospects.

Imperial Tobacco

Imperial Tobacco Group PLC (OTCMKTS:ITYBY) (LON:IMT) is an unloved company. The stock has underperformed in the home index, the FTSE 100 (INDEXFTSE:UKX), by nearly 15 percent so far this year, and Imperial has underperformed its only London listed peer by about 10 percent.

Imperial Tobacco’s underperformance due to Europe exposure

Imperial Tobacco Group PLC (OTCMKTS:ITYBY) (LON:IMT)’s underperformance has been down to its exposure to Europe, where the company’s sales have been hit hard by a combination of the economic situation and rising excise taxes on tobacco. In particular, as Imperial’s tobacco products become more expensive, and unemployment on the European continent rises, more and more customers are turning to the black market tobacco, which is significantly cheaper and is often of a similar quality.

Still, despite Imperial’s recent hardships on the European continent, the company has many strengths that I believe are being overlooked by the rest of the market. For example, the company’s spate of acquisitions over the last few decades have encompassed some of the most iconic tobacco brands in the world under Imperial’s umbrella. These brands include the world’s most popular and bestselling rolling paper brand, Rizla, the iconic Gauloises cigarette brand, and a 50 percent share in Habanos, the world’s leading distributor of fine Cuban cigars. In addition, Imperial is the fourth largest cigarette company within the U.S. and is the largest tobacco distributor in Europe and Eastern Europe.

So all in all, Imperial has a plethora of market leading brands, which are tantamount to Philip Morris International Inc. (NYSE:PM)’ Marlboro heritage. However, Imperial’s Achilles heal appears to be its European tobacco distribution business, which like many European transportation businesses is suffering from falling profit margins as costs rise while sales slow.

Imperial Tobacco working hard to cut costs

Nonetheless, Imperial Tobacco Group PLC (OTCMKTS:ITYBY) (LON:IMT) is working hard to cut costs across the group, targeting £30 million worth of cost savings this year and £300 million annually by 2018, one of the most aggressive cost-cutting plans in the tobacco industry.

What’s more, Imperial noted within its interim management statement that the company was achieving “excellent results in fine cut tobacco,” a sector where Imperial excels thanks to its portfolio of roll-your-own tobacco brands and accessories. Management also noted that its premium cigar offering was experiencing sales growth.

Imperial Tobacco driving growth forward in Asia

Elsewhere, Imperial Tobacco Group PLC (OTCMKTS:ITYBY) (LON:IMT) is driving growth forward in Asia, recently completing the acquisition of its Cambodian distributor and giving the company scope to further expand its footprint in Asia. Shareholder returns are also favorable. Imperial currently offers a dividend yield of just under 5 percent and is committed to a minimum payout increase of 10 percent annually in the medium term. The company also repurchased £500 million worth of shares during the first half of this year.

So all in all, Imperial Tobacco Group PLC (OTCMKTS:ITYBY) (LON:IMT) presents an interesting opportunity. Sold off on European worries the company could offer some value in a sector well-known for its lucrative shareholder returns. In addition, the company is working hard to cut costs, and this plan should enable Imperial to unlock a larger profit margin from its industry leading positions.