Cigarette maker Lorillard Inc. (LO) is set to report its fourth quarter and full year 2014 results on Feb 11, before the market opens. Last quarter, it posted in-line results on both counts. Let’s see how things are shaping up for this announcement.
Factors to Consider
Lorillard’s higher cigarette pricing has boosted sales for many quarters, despite declining cigarette volumes. Not only this, even with higher pricing, Lorillard has managed to maintain a dominant share in the cigarette market owing to its flagship brand Newport and the launch of several new products under this brand. Though cigarette pricing would continue to fuel sales in the upcoming quarters, volumes are expected to decline further as regulations on traditional cigarettes tighten and consumers shift to alternate tobacco products.
In addition, we remain concerned about the recent decline in net sales of electronic cigarettes, which comprises e-cigarette brands such as blu e-Cigs (acquired in Apr 2012) and SKYCIG (acquired on Oct 1, 2013). Lower unit volume and greater competition from rivals such as Altria Group, Inc. (MO) and Reynolds American, Inc (RAI), which rolled out their own e-cigarettes brands – Vuse and MarkTen – nationwide, impacted sales of blu e-Cigs in the recent quarters. Also, the shift in consumer preference from smaller e-cigarettes to tank devices, which are typically larger and have longer-lasting batteries and a puff that is more similar to a combustible cigarette are also harming e-cigarette sales.
Nevertheless, the recent news of shareholders’ approval for Lorillard’s merger with Reynolds American is encouraging. The companies now await the approval of the Federal Trade Commission, which is expected to announce its decision anytime in February, as stated by Reynolds American. Lorillard is tethered to menthol cigarettes. It would be able to diversify with Reynolds American's traditional tobacco brands such as Camel and American Spirit, if the $27.4 billion Reynolds-Lorillard deal materializes. In addition, both companies are likely to see significant cost synergies and should be able to shed a great deal of overlapping costs. The companies expect the transactions to close in the first half of 2015.
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 for this to happen. However, that is not the case here due to the following factors:
Zacks ESP:Lorillard’s Earnings ESP is -2.17% as the Most Accurate Estimate of 90 cents is lower than the Zacks Consensus Estimate of 92 cents per share.
Zacks Rank #3 (Hold):Lorillard’s Zacks Rank #3 when combined with an ESP of -2.17% makes surprise prediction difficult.
We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Another Stock to Consider
One other stock worth considering in the consumer staples sector that has both a positive earnings ESP and a favorable Zacks Rank is:
Supervalu, Inc. (SVU) with an Earnings ESP of +4.76% and a Zacks Rank #2 (Buy).
Post Holdings, Inc. (POST) with an Earnings ESP of +47.06% and a Zacks Rank #3 (Hold).
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