Reynolds Climbs to Outperform

We upped Reynolds American Inc. (RAI - Analyst Report), the owner of popular brands of cigarettes like Camel, Pall Mall, Winston, and Dunhill, from Neutral to an Outperform rating, based on rising investor confidence in this tobacco stock. The company was selected for the Dow Jones Sustainability Index. Moreover, the tobacco industry, which is consistently showing resilience to the economic headwinds, is increasingly attracting the investors.

Management remains committed to stimulating demand through innovative new product launches. Recent product innovations, which includes two new Camel SNUS styles, SNUS mint and Frost Large, have shown encouraging results in spite of it getting a very short term, or precisely, just one quarter. The new products offer adult tobacco consumers moreoptions to try and ultimately switch to this innovative product. Camel Crush and Camel Crush Bold offer adult smokers the option of choosing the way of enjoying their smoking experience.

Further, the company also expandedthe distribution of Grizzly moist snuff by way of new retail moist snuff contracts that were introduced in the second quarter to major metropolitan areas across the U.S.The product drove the company's performance, with excellent volume growth of more than 9% in the third quarter 2011. The company also expanded Camel Crush Bold throughout U.S. hails as being the company’s only cigarette line expansion in three years.

Moreover, in the recently ended quarter, Reynolds’ adjusted quarterly earnings of 70 cents per share for third-quarter 2011 increased approximately 2.9% from the prior-period earnings of 68 cents.

Management continues to enhance shareholders’ value through dividends. To portray the company’s strong ongoing business performance, the board of directors announced a 5.7% hike in dividend to 56 cents per share, which led to the total dividend increase to 14.3% over the past year. Though, currently, the company does not have any share repurchase programs, it plans to make significant capital investments into 2012, to fund for the changes in sales structure, the litigation charges and contribute the underfunded pension funds.

Weighing the pros and cons, the Zacks Consensus Estimate of earnings for fourth-quarter 2011 is currently pegged at 69 cents, 14.6% higher than the year-ago quarter. For 2011, profit is estimated to be $2.78, 11.76% higher from $2.49 in 2010.

Additionally, the quantitative Zacks Rank for Reynolds is currently #1, translating into a short-term Strong Buy rating.

Read the full analyst report on RAI