Reynolds American (RAI) Q4 Earnings: Stock to Disappoint?

Reynolds American Inc.RAI is scheduled to report fourth-quarter 2016 results on Feb 9, before the opening bell. Last quarter, the cigarette company missed the earnings estimate by 4.7%.

In the trailing four quarters, the company has missed the Zacks Consensus Estimate in three quarters and posted in-line results in the remaining one quarter, with an average negative earnings surprise of 3.4%.

Let's see how things are shaping up prior to this announcement.

Factors to Consider

Increased competition in the vapor category, declining volumes, strict anti-smoking regulations by governments globally and currency headwinds are the main factors that are weighing upon the company. The trend is expected to persist in the to-be-reported quarter as well.

Notably, Reynolds has been experiencing lower-than-expected top-line and bottom-line results in the past few quarters, primarily due to general shift of consumption away from tobacco products.

Reynolds is losing share in Moist Snuff segment and the performance of Camel brand remains under pressure. Additionally, the cigarette maker is facing margin pressure owing to pricing power of other major tobacco players and rising cost of sales. The situation is not expected to improve in the fourth quarter.

Reynolds American Inc Price and EPS Surprise

Reynolds American Inc Price and EPS Surprise | Reynolds American Inc Quote

Consequently, the company narrowed full-year 2016 guidance and now expects earnings to be in the band of $2.27-$2.33 per share compared with $2.26-$2.35 estimated previously in anticipation of soft fourth quarter.

The company has also experienced downward estimate revisions in the past 60 days. The earnings estimate for fiscal 2016 and fiscal 2017 declined 1.3% and 1.5%, respectively, in the past 60 days.

In January 2017, Reynolds entered into a merger agreement with British American Tobacco (BTI) which led to a spike in the share price of te company. The share price gained 22.8% in the last six months outperforming the Zacks categorized Tobacco industry.

Earnings Whispers

Our proven model does not conclusively show that Reynolds is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to surpass earnings estimates. However, that is not the case here as you will see below:

Zacks ESP: Earnings ESP for Reynolds is 0.00% as both the Most Accurate estimate as well as the Zacks Consensus Estimate are pegged at 60 cents. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Reynolds' carries a Zacks Rank #4 (Sell).

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Earnings Estimates

Here are some stocks that investors may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

ConAgra Foods Inc. CAG has an Earnings ESP of +4.55% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

Coty Inc. COTY has an Earnings ESP of +8.33% and a Zacks Rank #3.

Sanderson Farms Inc. SAFM has an Earnings ESP of +4.48% and a Zacks Rank #3.

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Reynolds American Inc (RAI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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