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Will Reynolds (RAI) Beat Earnings Estimates This Quarter?

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The tobacco giant, Reynolds American Inc. (RAI - Analyst Report), is set to report 2Q13 results on Jul 24, 2013, before the opening bell. Last quarter, it posted a 4.3% positive earnings surprise. Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Reynolds is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: Reynolds has an Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) of +2.41%. It represents the difference between the Most Accurate estimate (85 cents) and the Zacks Consensus Estimate (83 cents). This is a meaningful and leading indicator of a likely positive earnings surprise for shares.

Zacks #2 Rank (Buy): Reynolds carries a Zacks Rank #2 (Buy). Note that stocks with Zacks Ranks of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and 5) should never be considered going into an earnings announcement. 

The combination of Reynolds’ Zacks Rank #2 (Buy) and +2.41% ESP makes us very confident about a positive earnings beat on Jul 24.

What is Driving the Better than Expected Earnings?

Reynolds’ product innovations and cost reduction initiatives will help it to tide over the difficult economic conditions. Therefore, we are expecting the company to post modest profit and overall decent second-quarter results.

RAI’s newly formed subsidiary – RJ Reynolds Vapor Company – has re-engineered and developed a patented vapor technology and a brand called Vuse. RAI launched the brand in two varieties – Vuse Solo and Vuse System – in Colorado in Jun 2013.

We are encouraged by Reynolds’ focus on the fast growing e-cigarette category. E-cigarettes give the simulating effect of cigarettes thereby helping those who want to quit smoking.

Moreover, the tobacco maker strictly manages its costs. The business analysis completed by Reynolds recently in the fourth quarter of fiscal 2012 has found productive ways to reduce cost and channelize its resources. This is expected to boost profit in the coming quarter.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Sanderson Farms Inc.(SAFM - Snapshot Report), Earnings ESP of +17.11% and a Zacks Rank #1 (Strong Buy).

Tyson Foods Inc.(TSN - Analyst Report), Earnings ESP of +13.79% and a Zacks Rank #2 (Buy).

 Kraft Foods Group Inc.(KRFT - Analyst Report), Earnings ESP of +5.97% and a Zacks Rank #2 (Buy).

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