Shares of Reynolds American Inc. (RAI) hit a 52-week high of $73.19 on Feb 18, eventually closing at $73.15, yielding a healthy return of 13.8% year to date. Share price of this cigarette maker has been on the rise since it reported solid fourth-quarter and full-year 2014 results on Feb 10, 2015.
Solid Fourth-Quarter Performance
Reynolds’ fourth-quarter earnings per share of 87 cents improved 13% year over year backed by higher cigarette and moist snuff pricing, which more than offset the increased investment in the Vuse brand of e-cigarettes.
Net sales gained 4.7% year over year to $2.13 billion backed by higher sales in all its segments. Operating income went up 7.9% to $780 million due to higher pricing of moist snuff and cigarettes.
Although volume declined in the Smokeable category, Reynolds’ flagship brands namely Camel and Pal Mall gained substantial market share in the quarter. Moreover, in the smokeless category, Grizzly and Natural American Spirit brands gained significant market share. (Read: Reynolds America Q4 Earnings in Line, Revenues Miss)
It seems that investors are encouraged by Reynolds’ increased investment in its Vuse e-cigarette brand. The company accelerated the nationwide distribution of Vuse during the fourth quarter. The brand was made available in 100,000 outlets in February, and will be followed by further expansion in fiscal 2015. Four more styles were launched under the Vuse brand in the Colorado and Utah markets in Dec 2014 — rich mint, creme, chai and mint.
The pending Reynolds’ merger with peer Lorillard Inc. (LO) is also a matter of interest for investors. Last month, the proposed merger received favorable response from the shareholders of both the companies. The acquisition, in which Lazard Limited (LAZ) will act as a financial advisor, 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 e-cigarette market on the back of its blu e-Cigs (acquired in Apr 2012) and U.K.-based SKYCIG (acquired in Oct 2013) brands.
The combined entity might pose a threat to its peer, Altria Group Inc. (MO), which manufactures Marlboro cigarettes and commands more than 40% market share in the U.S.
Reynolds currently carries a Zacks Rank #2 (Buy).
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