On Sep 30, 2014, we issued an updated research report on Lorillard Inc (LO).
This cigarette maker reported second-quarter 2014 results on Jul 30 wherein it delivered earnings of 84 cents per share, up 3.7% from the prior-year quarter. Increase in cigarette sales and lower outstanding share count led to earnings growth in the reported quarter. However, earnings missed the Zacks Consensus Estimate of 88 cents by 4.5%, possibly due to lower sales in the e-cigarette segment.
Net sales in the reported quarter declined 0.3% year over year to $1.8 billion due to a steep decline in sales of electronic cigarettes, partially offset by a marginal increase in sales of regular cigarettes. Revenues comprehensively beat the Zacks Consensus Estimate of $1.3 billion by 34%.
Lorillard’s significant decline in its electronic cigarettes sales was alarming, raising concerns and questions about the strength of the nascent market. Sales of its electronic devices declined 35% to $37 million in the recently reported second quarter of 2014. The significant decline was due to greater competition from rivals Altria Group Inc (MO) and Reynolds American Inc (RAI), who rolled out their own e-cigarettes brands – Vuse and MarkTen – nationwide. These were earlier available in only two states.
Regular cigarette sales were marginally higher in the quarter owing to higher cigarette pricing. However, the company again witnessed decline in cigarette unit volumes. We note that cigarette volume has been declining since several quarters. The slowdown in the tobacco industry, increasing health consciousness among consumers, increases in taxes and significantly higher prices of cigarettes have hurt volumes. In addition, a rise in the number of people who quit smoking has also been impacting cigarette volume.
Not only this, Lorillard and other tobacco makers like Altria Group, Reynolds American and Philip Morris International Inc (PM) are bearing the brunt of increased regulation on packaging (graphic warning labels) in some international markets and heightened Food and Drug Administration concerns about the effects of menthol and electronic cigarettes.
Amid declining volumes and tough regulations, Reynolds American agreed to take over Lorillard on Jul 15 for $27.4 billion, including assumption of net debt. The merger is currently being reviewed by the Federal Trade Commission and may get delayed as antitrust authorities have decided to scrutinize the pros and cons of the amalgamation further. The companies expect the transactions to close in the first half of 2015.
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