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Reynolds American Likely to Bounce Back: Should You Hold?
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Reynolds American Inc. performance shows that the company has been trading in the red for a while now. The tobacco maker has been struggling due to increased competition in the vapor category, declining volumes, strict anti-smoking regulations by governments globally and currency headwinds.
Factor Affecting the Stock
We note that Reynolds has been experiencing lower volumes in the past few quarters primarily due to general shift of consumption away from tobacco products. During third-quarter 2016, the company delivered lower-than-expected top and bottom-line results for the second time in a row. Further, it reported a negative average surprise of 3.4% in the trailing four quarters.
Further, Reynolds narrowed its fiscal 2016 guidance and now anticipates earnings to be in the band of $2.27–$2.33 per share compared with $2.26–$2.35 estimated previously. Consequently, the company has experienced downward estimate revisions. The earnings guidance for fiscal 2016 and fiscal 2017 declined 1.3% and 1.5%, respectively, in the past 60 days.
Moreover, the company is losing share in Moist Snuff segment and the performance of Camel brand remains under pressure. Further, the vapor category did not perform as expected during the quarter under review. Additionally, the cigarette maker is likely to face margin pressure due to pricing power of other major tobacco players and rising cost of sales.
The tobacco industry in general is facing many challenges which have put margins under pressure. Governments worldwide are imposing restrictions on tobacco companies which in turn are lowering cigarette consumption. The U.K. and Australia governments have imposed regulations regarding plain packaging for cigarettes. Such actions negatively impact margins of the company.
However, these concerns are transitionary in nature and still keeps space for this Zacks Rank #3 (Hold) company to rebound in the long run. Reynolds’ stock price history reveals that it hasn’t disappointed for quite sometime. In fact, so far this year, the shares of this tobacco maker have risen 21.3%, outperforming the Zacks categorized Tobacco industry, which has showcased a gain of 11%.
Let’s delve deeper and bring what’s hidden to the surface.
The Growth Drivers
Reynolds’ impressive brand portfolio of tobacco products and constant investments in innovation and brand building helps in sustaining strong business momentum and generating decent profits.
The company has been trying to change its portfolio to meet the changing consumer demands of a general shift among consumers toward low-risk and smokeless tobacco products. Reynolds’ super premium brand, Natural American Spirit, is growing significantly buoyed by the increasing popularity of natural and organic products in the U.S. Further, the company’s focus on e-cigarettes is commendable. RJR Vapor's (a subsidiary of Reynolds) VUSE Digital Vapor Cigarette is popular in the vapor category and continues to aid top-line results.
In Nov 2016, British American Tobacco made an offer to purchase all of Reynolds American for $55.48 per share in a cash and stock deal. In the proposed offer, British American Tobacco would offer $24.13 in cash and $31.35 in stock based on current stock prices of both companies. We believe that if the deal materializes it is likely to be beneficial for the shareholders. Further, the combined entity will enjoy a major share in the tobacco industry post takeover.
With all the aforementioned factors at play, we feel that Reynolds may come out of the woods, which makes it a good choice for the long term.
Inter Parfums Inc. has an expected earnings growth of 15%. US Foods has an expected earnings growth rate of 17.1%, while Sysco Corporation has a long-term growth rate of 8.8%.
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Reynolds American Likely to Bounce Back: Should You Hold?
Reynolds American Inc. performance shows that the company has been trading in the red for a while now. The tobacco maker has been struggling due to increased competition in the vapor category, declining volumes, strict anti-smoking regulations by governments globally and currency headwinds.
Factor Affecting the Stock
We note that Reynolds has been experiencing lower volumes in the past few quarters primarily due to general shift of consumption away from tobacco products. During third-quarter 2016, the company delivered lower-than-expected top and bottom-line results for the second time in a row. Further, it reported a negative average surprise of 3.4% in the trailing four quarters.
Further, Reynolds narrowed its fiscal 2016 guidance and now anticipates earnings to be in the band of $2.27–$2.33 per share compared with $2.26–$2.35 estimated previously. Consequently, the company has experienced downward estimate revisions. The earnings guidance for fiscal 2016 and fiscal 2017 declined 1.3% and 1.5%, respectively, in the past 60 days.
REYNOLDS AMER Price, Consensus and EPS Surprise
REYNOLDS AMER Price, Consensus and EPS Surprise | REYNOLDS AMER Quote
Moreover, the company is losing share in Moist Snuff segment and the performance of Camel brand remains under pressure. Further, the vapor category did not perform as expected during the quarter under review. Additionally, the cigarette maker is likely to face margin pressure due to pricing power of other major tobacco players and rising cost of sales.
The tobacco industry in general is facing many challenges which have put margins under pressure. Governments worldwide are imposing restrictions on tobacco companies which in turn are lowering cigarette consumption. The U.K. and Australia governments have imposed regulations regarding plain packaging for cigarettes. Such actions negatively impact margins of the company.
However, these concerns are transitionary in nature and still keeps space for this Zacks Rank #3 (Hold) company to rebound in the long run. Reynolds’ stock price history reveals that it hasn’t disappointed for quite sometime. In fact, so far this year, the shares of this tobacco maker have risen 21.3%, outperforming the Zacks categorized Tobacco industry, which has showcased a gain of 11%.
Let’s delve deeper and bring what’s hidden to the surface.
The Growth Drivers
Reynolds’ impressive brand portfolio of tobacco products and constant investments in innovation and brand building helps in sustaining strong business momentum and generating decent profits.
The company has been trying to change its portfolio to meet the changing consumer demands of a general shift among consumers toward low-risk and smokeless tobacco products. Reynolds’ super premium brand, Natural American Spirit, is growing significantly buoyed by the increasing popularity of natural and organic products in the U.S. Further, the company’s focus on e-cigarettes is commendable. RJR Vapor's (a subsidiary of Reynolds) VUSE Digital Vapor Cigarette is popular in the vapor category and continues to aid top-line results.
In Nov 2016, British American Tobacco made an offer to purchase all of Reynolds American for $55.48 per share in a cash and stock deal. In the proposed offer, British American Tobacco would offer $24.13 in cash and $31.35 in stock based on current stock prices of both companies. We believe that if the deal materializes it is likely to be beneficial for the shareholders. Further, the combined entity will enjoy a major share in the tobacco industry post takeover.
With all the aforementioned factors at play, we feel that Reynolds may come out of the woods, which makes it a good choice for the long term.
Stocks to Consider
Some better-ranked stocks in the broader consumer staples sector include Inter Parfums Inc. (IPAR - Free Report) , US Foods Holdings (USFD - Free Report) and Sysco Corporation (SYY - Free Report) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Inter Parfums Inc. has an expected earnings growth of 15%. US Foods has an expected earnings growth rate of 17.1%, while Sysco Corporation has a long-term growth rate of 8.8%.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>