Will Reynolds (RAI) Disappoint Earnings Estimates in Q1? - Analyst Blog

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Reynolds American Inc.RAI is set to report first-quarter 2015 results on Apr 17, before the opening bell. Last quarter, the company reported in-line earnings. Let's see how things are shaping up for this announcement.

Factors to Consider

Reynolds has been witnessing lower-than-expected volumes of late due to a general consumer shift away from tobacco products due to price increase of cigarettes and worldwide anti-tobacco campaigns.

An unfavorable pricing war among tobacco makers due to higher taxes levied by governments across the world are also limiting Reynolds' pricing power. We believe that these headwinds will affect the first-quarter results as well.

To add to the woes, a strengthening dollar is likely to pull down the value of Reynolds international business which accounts for a decent percentage of its top line.

However, Reynolds' product innovations and cost reduction initiatives have helped it to tide over the difficult operating environment. Moreover, the company accelerated the nationwide distribution of Vuse in the fourth quarter, which is available in 1,00,000 outlets as of fourth quarter. This should aid the top line in the to-be-reported quarter.

Moreover, the company is looking forward to the pending $2.74 billion merger with Lorillard Inc. LO . Shareholders of both the company voted in favor of the merger. The merger is expected to close in fiscal 2015 and both the companies are positive towards it.

The acquisition, if materialized, is expected to consolidate the tobacco industry and increase growth opportunities for Reynolds. The merger would also bring brands like Newport and Camel under one banner and thus enhance its portfolio.

Moreover, Lorillard commands a solid presence in the profitable e-cigarette market on the back of the blu eCigs and SKYCIG brands. Reynolds is also geared to cement its position in the e-cigarette category with the nationwide distribution of its flagship e-cigarette brand Vuse. The merger will thus help Reynolds gain share in this category.

Earnings Whispers

Our proven model does not conclusively show that Reynolds is likely to beat earnings this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 to surpass earnings estimate. However, that is not the case here due to the following factors:

Zacks ESP: ESP for Reynolds is -3.80% as the Most Accurate estimate is pegged at 76 cents while the Zacks Consensus Estimate is 79 cents.

Zacks Rank: Reynolds' Zacks Rank #2 (Buy) increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

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

Stocks to Consider

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

Tyson Foods Inc. TSN , with an Earnings ESP of +8.00% and a Zacks Rank #2.

Estee Lauder Inc. EL , with an Earnings ESP of +1.96% and a Zacks Rank #3 (Hold).

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REYNOLDS AMER (RAI): Free Stock Analysis Report

ESTEE LAUDER (EL): Free Stock Analysis Report

LORILLARD CO (LO): Free Stock Analysis Report

TYSON FOODS A (TSN): 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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