On Jun 28, we retained our Neutral recommendation on
Reynolds American Inc.
) as the company reported softer sales but higher earnings in the
first quarter of fiscal 2013. Governmental actions that prohibit
the use of tobacco products along with the diminishing social
acceptance of smoking are adversely affecting Reynolds' cigarette
Why the Reiteration?
On Apr 23, Reynolds delivered adjusted earnings of 72 cents
per share for the first quarter of fiscal year 2013, ahead of the
Zacks Consensus Estimate of 69 cents by 4.3%. Earnings were up
14.3% from the prior-year quarter due to positive pricing and
tight cost control.
However, net sales in the reported quarter slipped 2.6% year
over year to $1.8 billion due to declining cigarette volumes.
Quarterly net sales also missed the Zacks Consensus Estimate of
Following the release of the first-quarter results, the Zacks
Consensus Estimate for fiscal 2013 remained flat at $3.22. For
fiscal 2014, the Zacks Consensus Estimate also remained the same
Reynolds has a strong brand portfolio of cigarettes, which
helps it to command a leading market share in the tobacco
industry. Moreover, it adapts to changing consumer demand and
develops its products through continuous innovations.
There has been a general shift among consumers toward low-risk
and smokeless tobacco products. Therefore, Reynolds is developing
innovative, smoke-free tobacco products. It has also increased
its focus on the e-cigarette category like its peers
Altria Group Inc.
Philip Morris International
). The company has formed a new subsidiary, R.J. Reynolds Vapor
Company, and is developing its patented vapor technology and a
brand called Vuse.
Moreover, management is keen on product innovation through
cost savings. It plans to save about $70 million annually by 2015
to be used for product innovation and strengthen its key brands.
However, strict anti-smoking regulations imposed by the
governments across the world, higher manufacturing as well as
marketing costs are matters of concern.
Higher taxes imposed by the governments are forcing companies
to increase prices. Moreover, price increases and an unfavorable
excise tax environment have led to a decline in cigarette
shipments in the U.S. by 3.8%, 3.5% and 2.3% in 2010, 2011 and
2012, respectively. Hence, we prefer to remain on the sidelines
for this stock.
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