Cigarette company Lorillard Inc. (LO) is set to report its third quarter 2014 results on Oct 23 before the market opens. Last quarter, it posted a 4.55% negative surprise. Let’s see how things are shaping up for this announcement.
Factors to Consider This Quarter
Lorillard has a dominant share in the cigarette market owing to its flagship brand Newport and the launch of several new products under this brand. However, a decline in cigarette volumes remains a concern since past many quarters. The slowdown in the tobacco industry, increasing health consciousness among consumers, tax increases 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.
Though we believe that higher pricing will boost cigarette segment sales growth in the quarter, we do not expect volumes to improve in the near term.
Lorillard’s e-cigarette segment, which comprises of e-cigarette brands blu e-Cigs (acquired in Apr 2012) and SKYCIG (acquired on Oct 1, 2013), proved to be the company’s strength in the past year. However, the segment witnessed significant decline in the last reported quarter, raising concerns and questions about the strength of the nascent market.
Sales of its electronic devices declined 35% in the second quarter 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. Unfavorable pricing mix as well as a decline in unit volumes also led to the decline in the e-cigarette segment. We are unsure whether this segment will revive in the upcoming quarter.
Lorillard is also facing the brunt of increased regulation on cigarette packaging (graphic warning labels) and heightened Food and Drug Administration (FDA) concerns about the effects of menthol and electronic cigarettes, which may continue to hurt in the upcoming quarter.
Earnings Whispers?
Our proven model does not conclusively show that Lorillard 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 estimates. However, that is not the case here due to the following factors:
Zacks ESP:Lorillard’s Earnings ESP is 0.00%.
Zacks Rank #2 (Buy): Lorillard’s Zacks Rank #2 when combined with an ESP of 0.00% makes surprise prediction difficult.
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 momentum.
Other Stocks to Consider
Other stocks worth considering in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Post Holdings, Inc. (POST) with an Earnings ESP of +50.0% and a Zacks Rank #1 (Strong Buy).
Hershey Co. (HSY) with an Earnings ESP of +2.78% and a Zacks Rank #3 (Hold)
Newell Rubbermaid Inc. (NWL) with an Earnings ESP of +1.82% and a Zacks Rank #3.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment