We maintain our Neutral recommendation on
Reynolds American Inc.
), following the appraisal of its fourth quarter 2012
Why the Reiteration?
Reynolds American delivered its fourth quarter 2012 earnings
on Feb 12, 2013. Adjusted earnings of $0.76 climbed 5.6% from the
prior-year quarter earnings and were also ahead of the Zacks
Consensus Estimate by 9.7%, on the back of improved earnings and
strong business in the moist snuff segment. However, the company
continued to see lower cigarette shipment volumes and an
unfavorable excise tax scenario.
We are encouraged by the company's continuous effort to
adapt to evolving demands and bring out innovative smokeless
non-combustible tobacco products that do not cause as much harm
as traditional tobacco. The Natural American Spirit, which is the
premium brand of the Santa Fe segment of Reynolds, commands a
major share in the U.S. smokeless cigarette market, having grown
from 30.3% in 2010 to 32.4% in 2012. Reynolds' tailor made
e-cigarette category, which is used as a simulating substitute of
the cigarette, is also gaining popularity in the U.S. market.
Although the company is on track to achieve its cost reduction
goal and has undertaken measures like slimming down its workforce
to cut down on its expenses, the unfavorable excise tax scenario
and restrictions imposed on tobacco companies, following
widespread anti-tobacco campaigns, have resulted in a consistent
decline in cigarette shipments for several years. Moreover,
competitive pricing by market leaders and aggressive promotions
are resulting in depressed margins for several quarters.
Other Stocks to Consider
Reynolds carries Zacks Rank #3 (Hold). Other stocks in the
Consumer Staples segment like
Altria Group Inc.
Procter & Gamble Company
), each carrying a Zacks Rank #2 (Buy), are also worth
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