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We reaffirm our Neutral recommendation on Lorillard Inc (LO - Analyst Report) despite solid second quarter 2013 results owing to concerns about the continued slowdown in the cigarette industry.

Why the Reiteration?

Lorillard’s second quarter earnings of $0.81 per share exceeded the prior-year earnings by 11.0%. It also beat the Zacks Consensus Estimate by a penny. The rising market share of the company’s brands, tight cost control measures and success of the company’s electronic cigarette brand – blu e-Cigs – proved to be Lorillard's strength in the second quarter of 2013.

Net sales increased 4.2% from the prior-year period on the back of higher sales of electronic cigarettes. It also beat the Zacks Consensus Estimate.

We are encouraged by the company’s dominant share in the cigarettes market with the rising popularity of its Newport and Maverick brands, despite slowdown in the cigarette industry. Lorillard’s Newport brand has been able to increase its domestic market share since 2009, even with higher cigarette pricing. The strength of the brand has enabled the company to charge premium prices, resulting in profitability.

Moreover, Lorillard is adapting to changing consumer demands owing to increasing health consciousness among the youth, which has reduced the demand for tobacco over time. With the acquisition of the e-cigarette brand blu e-Cigs in Apr 2012, the company has expanded its footprint in the profitable electronic cigarettes market. The company has also launched a rechargeable kit for e-cigarette users in the second quarter and plans to introduce e-cigarettes in Canada in the third quarter of 2013.

However, Lorillard has been witnessing a decline in cigarette volumes since the past many quarters. The slowdown in the tobacco industry, increasing health consciousness among consumers and significantly higher prices of cigarettes has impacted volumes. Moreover, the industry deals with increased regulation on packaging (graphic warning labels) in some international markets and heightened Food and Drug Administration (FDA) concerns about the effect of menthol cigarettes and electronic cigarettes.

Lorillard holds a Zacks Rank #3 (Hold). Other consumer staples stocks that warrant a look are Pinnacle Foods Inc (PF - Snapshot Report), Green Mountain Coffee Roasters Inc (GMCR - Analyst Report) and Dole Food Co. Inc. . While Pinnacle Foods and Green Mountain hold a Zacks Rank #1 (Strong Buy), Dole Food hasa Zacks Rank #2 (Buy).

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