Did the FDA Just Put Lorillard Inc. (LO) Earnings at Risk?

Lorillard Inc. (NYSE:LO) will release its quarterly report on Thursday, and until recently, investors had been very optimistic about the company’s long-term prospects, bidding the shares up to all-time highs since its 2008 initial public offering. But bad news from the FDA today threatens to put a stop to the growth that Lorillard earnings have seen lately, and shares tumbled as a result.

Lorillard Inc.Lorillard Inc. (NYSE:LO) isn’t a household name among most consumers, but with cigarette brands like Newport and Kent, most smokers are at least familiar with its products. The tobacco industry in general has had trouble posting solid growth lately, with overall declines in volume as smoking becomes less common in the U.S., but Lorillard has bucked the trend with solid growth in both earnings and revenue. Will the FDA’s move reverse the company’s fortunes going forward? Let’s take an early look at what’s been happening with Lorillard over the past quarter and what we’re likely to see in its quarterly report.

Stats on Lorillard

Analyst EPS Estimate $0.80
Change From Year-Ago EPS 9.6%
Revenue Estimate $1.28 billion
Change From Year-Ago Revenue 6.6%
Earnings Beats in Past 4 Quarters 2

Source: Yahoo! Finance.

Where are Lorillard earnings headed this quarter?

Over the past few months, analysts had actually boosted their views on Lorillard Inc. (NYSE:LO) earnings, holding their June-quarter estimates steady but adding $0.02 per share to their full-year 2013 calls and a full dime per share for 2014. The stock had also been doing very well, climbing almost 15% since mid-April.

Lorillard Inc. (NYSE:LO)’s success has come from a combination of strategies aimed at diversifying its overall product portfolio. On one hand, the company has vigorously defended its core cigarette market, joining with peer Reynolds American, Inc. (NYSE:RAI) to defeat an FDA proposal last year that would have greatly expanded requirements for graphic warning labels on cigarette packaging. Even with an onslaught of ad campaigns and more local smoking restrictions, Lorillard has been able to keep growing, with sales up 3.3% in the first quarter compared to the year-ago quarter and climbing market share for its overall cigarette portfolio and for Newport in particular. Lorillard also got FDA approval for new non-menthol cigarettes last month under the Newport brand, with plans to start marketing Non-Menthol Gold Box and Gold Box 100 products in the near future.

Lorillard Inc. (NYSE:LO) has also embraced change in the industry, with its blu eCigs available in more than 80,000 retail outlets and posting 40% retail market share in the emerging e-cigarette market. With its alternative method of delivering nicotine to consumers, e-cigarettes could end up escaping the harsh regulation that applies to tobacco products, and Lorillard has gotten in ahead of industry giant Altria Group Inc (NYSE:MO) and other rivals in identifying the e-cigarette trend and coming up with a strong sales strategy.

But today’s preliminary evaluation from the FDA could pose a big problem for Lorillard. The agency asked for input on whether to set new standards that would prohibit or limit the use of menthol in cigarettes, having determined that menthol cigarettes raise public health issues and could encourage smoking. Although both Altria Group Inc (NYSE:MO) and Reynolds American, Inc. (NYSE:RAI) sell menthol versions of their popular cigarette brands, Newport is the top-selling menthol brand, and so Lorillard took the biggest hit today. Industry experts are hopeful that the FDA will stop short of a full ban, but even less extreme measures could affect the company going forward.