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Reynolds American (RAI) Q4 Earnings Top, Sales Lag Estimates

Reynolds American Inc. 's RAI fourth-quarter 2016 adjusted earnings of 62 cents per share surpassed the Zacks Consensus Estimate of 60 cents by 3.3%. Further, the bottom line improved 29.2% from the year-ago quarter driven by higher cigarette and moist snuff pricing.

Adjusted earnings per share exclude charges associated with the transaction and financing cost, implementation cost and charges related to the Engle Progeny lawsuits, other tobacco-related litigations and Non-Participating Manufacturer (NPM) Partial Settlement with two additional states.

Revenues and Operating Margin

Reynolds' net sales gained 4.3% year over year to $3.19 billion, driven by higher sales across all the segments. Quarterly net sales missed the Zacks Consensus Estimate of $3.20 billion.

Adjusted operating income increased 22.1% to $1.53 billion on the back of higher pricing of moist snuff and cigarettes.

Reynolds American Inc Price, Consensus and EPS Surprise

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

Segment Details

RJR Tobacco : Revenues improved nearly 3.4% to $2.60 billion owing to market share gain by brands like Camel and Pall Mall.

Shipment dipped 2.3% due to decrease in tobacco consumption. Market share declined by 0.2 percentage points (pp) to 32%. RJR Tobacco's combined retail market share of Newport, Camel and Pall Mall remained flat year over year at 29.7%.

The Camel brand continued to perform well with market share going up by 0.1 pp year over year to 8.2%. However, Pall Mall's market share declined 0.3 pp to 7.6%. Market share of Newport, the leading menthol brand, increased 0.2 pp to 13% on new retail contracts.

The segment's adjusted operating income rose 18% year over year to $1.33 billion as a result of lower operating costs and higher cigarette net pricing. Operating margin increased 6.3 pp to 50.9% buoyed by an improved mix of premium cigarettes.

American Snuff : Revenues grew 15.2% year over year to $243 million supported by higher volumes.

Grizzly brand's retail market share increased 0.3 pp to 31.2%. Volume declined 0.8-2.4%.

Adjusted operating income increased 7.7% year over year to $542 million owing to higher pricing and volume. Operating margin increased 0.5 pp to 59.3% backed by improved mix of premium cigarettes.

Santa Fe : Revenues jumped 2.6% year over year to $232 million owing to higher volume.

The segment's super premium brand - Natural American Spirit - witnessed a 7.4% increase in volume, while its market share went up 0.3 pp to 2.3%.

Adjusted operating income climbed 25.5% year over year to $139 million on pricing and volume gains in the super premium cigarette category. Operating margin inflated 4.7 pp to 57.5%.

Full Year Results

Full year 2016 adjusted earnings of $2.31 per share surpassed the Zacks Consensus Estimate of $2.29. Further, the bottom line improved 16.7% from the year-ago quarter driven by higher cigarette and moist snuff pricing.

Reynolds' net sales gained 17.1% year over year to $12.5 billion, on the back of higher sales across all the segments. Quarterly net sales surpassed Zacks Consensus Estimate of $12.48 billion.

Other Financial Update

On Jan 18, 2017, Reynolds has agreed to merge with British American Tobacco for $29.44 cash and a number of American Depositary Shares representing 0.5260 of British American Tobacco's ordinary share. Investors were buoyed by the news, evident from the share rally after Reynolds stated its consent to the proposal.

We believe that the merger is not anticipated to face too many antitrust hurdles. While Reynolds has most of its operations in the U.S., British American Tobacco apart from its stake in Reynolds mostly operates outside the country.

The combined entity will truly own a global portfolio including next generation products and strong cigar brands including Kent from British American Tobacco and Camel, Newport and Pall Mall from Reynolds. Further, the combined company will benefit from Reynolds' strong position in the alternative tobacco and next-generation product development, and R&D capabilities. Consequently, the newly merged entity can develop an innovative pipeline of vapor and tobacco-heating products.

Reynolds American exited the third quarter with cash and cash equivalent of $2.05 billion compared with $1.91 billion in the previous quarter.

Long-term debt was $12 billion compared with $500 million in the preceding quarter. The board approved a10.9% increase in the quarterly cash dividend, to 51 cents per share to be payable on Apr 3, 2017, to shareholders of record on Mar 10, 2017.

Zacks Rank & Key Picks

Reynolds carries a Zacks Rank #4 (Sell). One can count on better-ranked stocks including Helen of Troy Ltd. HELE carrying a Zacks Rank #2 (Buy) and has an expected earnings growth rate of 10.8%. You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here.

Pinnacle Foods Inc. PF also carries a Zacks Rank #2 and has an expected earnings growth rate of 8.3%.

Con Agra Foods Inc. CAG , another Zacks Rank #2 stock has an expected earnings growth rate of 8%.

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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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