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Reynolds (RAI) Posts In-Line Q3 Earnings, Tightens FY View

Reynolds American Inc. 's RAI adjusted earnings of 55 cents per share in the third quarter of 2015 came in line with the Zacks Consensus Estimate. Earnings also improved 17% year over year backed 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 litigation and Non-Participating Manufacturer (NPM) Partial Settlement with two additional states.

Revenues and Operating Margin

Reynolds' net sales increased 41.1% year over year to $3.16 billion driven by higher sales in all the segments. Quarterly net sales also beat the Zacks Consensus Estimate of $3.11 billion by 1.6%.

Adjusted operating income went up 64.9% to $1.4 billion on the back of higher pricing of moist snuff and cigarettes.

Segment Details

RJR Tobacco : Segment revenues increased 46.24% to $2.63 billion backed by market share gain by brands like Camel and Pall Mall.

Volumes increased third-quarter cigarette shipments were up 30.2% benefiting from the addition of the Newport brand following the Lorillard acquisition. RJR Tobacco's combined retail market share of Newport, Camel and Pall Mall shrank 0.1 percentage point (pp) year over year to 30.2%.

Camel continued to perform well though its market share remained flat at 8.3%. However, Pall Mall's market share went down 0.3 pp to 7.8%. Market share of Newport, the leading menthol brand, increased 0.5 pp to 13.3%.

Compared with the year-ago quarter, the segment's adjusted operating income climbed 64.6% to $1.2 billion as a result of lower operating cost.

American Snuff : Segment revenues increased 3.9% year over year to $210 million supported by higher volumes.

The segment's sales volume outpaced industry volume growth and increased 4.4% year over year. The moist snuff market share gained 1.3 pp to 33.7%. The brand benefited from solid demand for Grizzly's pouch styles and Wintergreen offerings.

Adjusted operating income rose 3.4% year over year to $121 million gaining from higher pricing and volume.

Santa Fe : Segment revenues jumped 21.8% year over year to $218 million backed by higher volume.

The segment's super premium brand Natural American Spirit's volume inflated 19.3% year over year, and market share went up 0.3 pp to 1.9%.

Adjusted operating income increased 23.2% year over year to $120 million, driven by pricing and volume gains in the super premium cigarette category.

Other Financial Update

Concurrent with the third-quarter conference call, Reynolds announced that it has agreed to sell assets worth $5 billion.

In Sep 2015, Reynolds' subsidiary R.J. Reynolds Tobacco Company and British American Tobacco plc ("BAT"), recently joined forces to leverage their technological know-how to boost their presence in the unconventional cigarette space.

Per the multi-year deal, the two companies will work on a joint research, development and technology-sharing framework for developing e-cigarettes through 2022.

2015 Guidance

Reynolds American tightened the full-year 2015 guidance to reflect the solid third-quarter results. The company expects earnings within $1.94 to $2.00 on a split-adjusted basis, compared with the $1.90 to $2.00 range.

Reynolds carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the consumer staple sector are Cal-Maine Foods CALM , Diamond Foods Inc. DMND and Flower Foods Inc. FLO . While Cal-Maine sports a Zacks Rank #1 (Strong Buy), Diamond Foods and Flower Foods carry a Zacks Rank #2 (Buy).

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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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