Shares of Reynolds American Inc. (RAI) hit a 52-week high of $65.57 on Nov 11, eventually closing at $65.06, yielding a healthy return of 34.8% year-to-date. Share price of this cigarette maker has been rising ever since it reported solid third-quarter 2014 results with better-than-expected earnings and revenues on Oct 21.
Solid Third-QuarterPerformance
Reynolds’ third-quarter earnings per share of 95 cents beat the Zacks Consensus Estimate of 91 cents by 4.4%. Earnings also improved 10.5% year over year backed by higher pricing of both cigarette and moist snuff.
Net sales gained 4.9% year over year to $2.24 billion due to higher sales in all its segments. Quarterly net sales also beat the Zacks Consensus Estimate of $2.18 million by 2.8%.
Although volume declined in the Smokeable category, Reynolds’ flagship brands namely Camel and Pal Mall gained substantial market share during the quarter. Moreover, in the smokeless category, Grizzly and Natural American Spirit brands gained significant market share.
It seems that investors are encouraged by Reynolds’ increased investment in its e-cigarette brand called Vuse. The company accelerated the nationwide distribution of Vuse during the recently concluded third quarter. The brand was made available in 70,000 outlets in November, to be followed by further expansion in fiscal 2015.
Reynolds American maintained the fiscal 2014 guidance. The company expects earnings in the range of $3.35 to $3.45. The guidance reflects an increase of 5% to 8.2% from $3.19 in fiscal 2013. (Read: Reynolds Beats Q3 Earnings, Revenues; Maintains FY View)
The pending Reynolds’ merger with Lorillard Inc. (LO) is also a matter of interest for investors. The acquisition, if materialized, will consolidate the tobacco industry and bring in growth opportunities for Reynolds. Lorillard’s Newport brand holds the number one position in the menthol cigarettes market in the U.S. Lorillard also has a solid footprint in the profitable electronic cigarettes market with its blu e-Cigs (acquired in Apr 2012) and U.K.-based SKYCIG (acquired in Oct 2013) brands.
Other Stocks to Consider
Reynolds American has a Zacks Rank #3 (Hold). Another cigarette company stock worth considering is Altria Group Inc. (MO) with a Zacks Rank #2 (Buy). Another stock in the consumer staples sector that is performing well at the current level is Keurig Green Mountain Inc. (GMCR) and has the same Zacks Rank as Altria.
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