Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Lorillard Inc. (LO), Reynolds American, Inc. (RAI): The FDA Presents Another Great Buying Opportunity

All the major tobacco companies saw a nice pullback last week as renewed concerns surfaced surrounding the FDA and menthol cigarettes, with my personal favorite, Lorillard Inc. (NYSE:LO), down over 5.5%.

Fellow contributor Robert Ciura notes that he would avoid both Reynolds American, Inc. (NYSE:RAI) and Lorillard Inc. (NYSE:LO) due to their exposure to the methanol brands, where Lorillard has the key menthol brand Newport, and Reynolds sells Salem. cigarettes.

Lorillard Inc.However, I think this could be a solid buying opportunity for investors looking to get into a stable, high-dividend paying industry. There was a similar scare back in 2011 when an advisory committee at the FDA ruled that the removal of menthol from the tobacco marketplace would benefit public health greatly.

Even as tobacco companies have been forced to disclose the various dangers of their products, they’ve survived the onslaught of anti-smoking campaigns, seen taxes on their products move higher and higher, and had their products disallowed in various public places, yet people continue to smoke.

U.S. sales leader

The dominant force in the U.S. tobacco market is, and has been for some time, Altria Group Inc (NYSE:MO). Revenue is expected to be up 1% in 2013, thanks to mid-single-digit volume growth in the smokeless-tobacco segment.

Meanwhile, revenue is expected to be up 3% in 2014. Altria Group Inc (NYSE:MO) has a robust product portfolio, which includes Marlboro, Virginia Slims, Copenhagen, Skoal, Chateau Ste. Michelle and Columbia Crest.

The move to more smokeless products should not only help drive revenue higher, but also  boost margins. Last quarter, gross profit was up 2.4% year-over-year thanks to a lower cost of sales. The smokeable-products category saw operating income rise 1.5% last quarter, while the smokeless-products segment’s operating income was up 12.5%.

Altrai’s smokeless tobacco brands, Copenhagen and Skoal, continue to gain market share. From 2008 to 2012, Copenhagen and Skoal together saw their market share rise from 47.5% to 50.6%.

Revenue growth and expansions

Reynolds American, Inc. (NYSE:RAI) expects to see revenue grow slightly in 2013 and 2014. The company is looking to embrace the increase in smokeless tobacco volumes, expecting to see increased volume in its American Snuff segment.

Reynolds American, Inc. (NYSE:RAI) is also expanding its tobacco brands by offering new mint flavors for the Camel brand. Reynolds also offers a super premium brand, Natural American Spirit. The tobacco company recently announced 2Q EPS of $0.84, compared to $0.79 last year. However, cigarette shipments did fall 6% last quarter, and market share fell from 26.3% to 26%. Even still, worth noting is that its Pall Mall and Camel brands’ market share was up 0.9 percentage points to 17.6%.

Lorillard Inc. (NYSE:LO) also recently posted strong 2Q EPS results. EPS came in at $0.81 versus $0.73 for the same period last year. Lorillard continues to grow market share nicely. Back in 2012, Lorillard’s market share increased 0.3 share points to 14.4%.

Meanwhile, Lorillard Inc. (NYSE:LO) launched a variation of non-menthol products in late 2010 to help expand beyond the Newport Menthol brand. Lorillard is also turning to e-cigarettes. The company acquired blu eCigs, which contributed $61 million to sales 2012. During 1Q 2013, Lorillard expanded the blu eCigs distribution to more than 80,000 retail outlets and captured over 40% of the e-cig retail market share.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.