We maintained our Neutral recommendation on
Reynolds American Inc.
(
RAI
) following the appraisal of the second quarter 2012 results.
The company continues to face certain restrictions imposed by
governments around the world to reduce smoking in the respective
countries. Moreover, increased promotional activities by
competitors are posing threat to the company's biggest brands like
Pall Mall and Camel. For example, Reynold's biggest peer
Altria Group Inc.
(
MO
) has been busy with several innovative launches and marketing
campaigns of Marlboro.
These competitive actions by Altria have considerably dented
Pall Mall and Camel's market share for several quarters. Reynolds
does not seem to have any near-term corrective measure to combat
the competition.
Reynolds' net sales in the second quarter of 2012 declined 4.0%
year over year to $2.2 billion due to declining cigarette volumes.
Quarterly net sales also missed the Zacks Consensus Estimate of
$2.3 billion.
Revenues from Reynolds American's largest operating segment
comprising operations of R. J. Reynolds Tobacco Company, a
subsidiary of Reynolds American, declined 6.5% year-on-year to
$1.83 billion in the second quarter. Volume and market share also
declined due to soft results of Camel and Pall Mall.
However, we are encouraged by the company's commitment to
stimulating demand through new and innovative product launches.
Moreover, smokeless category is showing a possibility of growth in
the US market. Santa Fe's Natural American Spirit (NAS) brand is
the only United States Department for Agriculture (USDA) certified
organic cigarette in the world.
Moreover, we remain confident about management's continuous
endeavor to enhance shareholder value through dividend payments. In
May 2012, the company's board of directors approved a quarterly
cash dividend of 59 cents per share, reflecting 5.4% hike on the
previous payout.
This is the ninth dividend increase of the company since its
inception in 2004. The incessant dividend hike is encouraging as it
indicates improving profitability. We believe that this could
ultimately boost investor loyalty.
Reynolds American currently retains a Zacks #2 Rank (Buy
rating).
Headquartered in Winston-Salem, NC, Reynolds American, Inc. is a
leading cigarette and smokeless tobacco product manufacturer. Its
subsidiaries include R. J. Reynolds Tobacco Company (RJR), American
Snuff Company, LLC, , Santa Fe Natural Tobacco Company, Inc.; and
Niconovum AB.
ALTRIA GROUP (MO): Free Stock Analysis Report
REYNOLDS AMER (RAI): Free Stock Analysis Report
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