Reynolds American Inc. (RAI) is set to report third-quarter fiscal 2014 results on Oct 21. Last quarter, the company delivered a positive surprise of 8.5%. Let us see how things are shaping up for this announcement.
Factors to be Considered This Quarter
We believe that Reynolds will have to struggle to surpass estimates in the third quarter fiscal 2014. The company has been facing dwindling volumes due to declining cigarette demand as a result of the ongoing anti-tobacco campaigns. We expect the declining trend to continue in the third quarter thus putting pressure on top and bottom line figures.
Moreover, governments around the world are levying higher excise taxes on cigarettes and imposing packaging and advertising restrictions on cigarette makers. This has resulted in a pricing war among tobacco companies and significant price cut of low and mid-range cigarettes.
In addition, Reynolds had to pay a substantial amount of $16.8 million in compensatory damage and $23.6 billion as punitive damage after a Florida jury passed an unfavorable verdict in the Engle Progeny case last month. Such litigations increase the expense of the company.
Earnings Whispers?
Our proven model does not conclusively show that Reynolds International 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:
Negative Zacks ESP: The company’s Earnings ESP stands at -1.10%. This is because the Most Accurate estimate is 90 cents, while the Zacks Consensus Estimate is pegged at 91 cents.
Zacks Rank: Reynolds has a Zacks Rank #4 (Sell).
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Other Stocks to Consider
Here are some other 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:
V.F. Corporation. (VFC), with an Earnings ESP of +0.92% and a Zacks Rank #2 (Buy).
UNder Armour Inc. Inc. (UA), with an Earnings ESP of +2.50% and a Zacks Rank #2.
The Hershey Company (HSY), with an Earnings ESP of +2.78% and a Zacks Rank #3.
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