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Reynolds American, Inc. (RAI), Altria Group Inc (MO): A Look at Cigarette Companies in a Declining Market

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Health habits and government regulation have negatively affected the tobacco industry. At the same time, new opportunities have been created for those who adapt. Let us take a look at what Reynolds American, Inc. (NYSE:RAI), Lorillard Inc. (NYSE:LO), and Altria Group Inc (NYSE:MO) have been doing to keep a declining market profitable.

Reynolds American, Inc. (NYSE:RAI)

Thank you for NOT smoking

Reynolds American, Inc. (NYSE:RAI) reported improved earnings per share, but a drop on sales. Government regulation had a negative impact over sales, but shareholders have benefited nonetheless. Earnings growth is the result of cost reduction and positive pricing, which helped to offset the decline on the firm’s leading brands sales.

After selling its international business, Reynolds American, Inc. (NYSE:RAI) limited operations to the US market. Demand has shifted to smokeless tobacco products, and the firm has responded in kind. Cost reduction and improved productivity have allowed the business to capture part of the growing demand helping to keep revenues stable. For those who keep on puffing, the company offers a natural brand that has been capturing a bigger market share over the past years. At the same time, R&D has put out a new vapor technology.

Financially, Reynolds American, Inc. (NYSE:RAI) is good condition. Revenue and cash flow remain stable, while free cash has been on the rise. This market performance allows the company to keep investing on new smokeless products, which have already proved to be successful. The downside is raising debt in 2012, which has reverted its downward trend after several years.

Currently, Reynolds American, Inc. (NYSE:RAI) trades slightly over industry average valuations and close to its 52-week high. However, my recommendation is a Buy because the company’s operating margin is above the industry’s average and the projected yield is around 5%. Moreover, the firm has proved to adapt to new market demands making the stock suitable for long-term investment.

Menthols will refresh and freeze revenues

A long road has been walked since Kool cigarettes arrived to the market. Today, menthol cigarettes are a worldwide fashion, and Lorillard Inc. (NYSE:LO) is leading the pack. Like Reynolds American, Inc. (NYSE:RAI), the firm has entered the e-cigarette market, has seen its debt rise considerably, and operations are limited to the US market.

Far from similarities, Lorillard Inc. (NYSE:LO) depends heavily from the US market and its menthol segment. The firm will find declining smoking habits a big obstacle to maintain its market position and financial health. Growing FDA regulation is putting heavier pressure on the firm to adapt, and acquisitions towards that end have been made.

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