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Reynolds (RAI) Downgraded to Sell on Macro Headwinds

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Tobacco maker, Reynolds American Inc. seems to have hit a rough patch at the moment. However, the company’s shares have gained 18.4% in the past three months, outperforming the Zacks categorized Tobacco industry, which has witnessed a gain of 4%. Nonetheless, we feel that the stock may come under pressure as the industry is not performing well and occupies a space in the bottom 31% of the Zacks Classified industries (184 out of the 265).

Increased competition in the vapor category, declining volumes, strict anti-smoking regulations by governments globally and currency headwinds are the main factors that are weighing upon the company.

Notably, Reynolds has been experiencing lower-than-expected top-line and bottom-line results in the past few quarters, primarily due to general shift of consumption away from tobacco products. While the top line and bottom line met expectations for fourth-quarter 2015, the company failed to meet expectation for the remaining quarters in the past one year. Further, it reported a negative average surprise of 3.4% in the trailing four quarters.

Consequently, the company narrowed its full year 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 is losing share in Moist Snuff segment and the performance of Camel brand remains under pressure. Additionally, the cigarette maker is facing margin pressure owing to pricing power of other major tobacco players and rising cost of sales.

The tobacco industry in general is plagued with challenges at the moment 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. Moreover, Reynolds’ plan to expand into the emerging market of India was crushed when the Indian government ruled out any direct foreign investment of tobacco companies in order to safeguard public health.

Reynolds currently carries a Zacks Rank #4 (Sell).

Stocks that Warrant a Look

Some better-ranked stocks in the broader consumer staples sector include ConAgra Foods Inc. (CAG - Free Report) , Campbell Soup Company (CPB - Free Report) and Pinnacle Foods Inc. , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConAgra Foods has an expected earnings growth of 8%. Campbell Soup has an expected earnings growth rate of 5.6%, while Pinnacle Foods has a long-term growth rate of 6.5%.

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