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Reynolds American (RAI) Beats on Q1 Earnings, Revenues

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Reynolds American Inc.’s adjusted earnings of 86 cents per share in the first quarter of 2015 surpassed the Zacks Consensus Estimate of 79 cents by 8.8%. Earnings improved 19.4% year over year backed by higher cigarette and moist snuff pricing, which more than offset the increased investment in the Vuse brand of e-cigarettes.

Adjusted earnings per share exclude charges associated with the transaction and financing cost, implementation cost and charges related to the Engle Progeny lawsuits, other tobacco-related litigation and Non Participating Manufacturer (NPM) Partial Settlement with two additional states.

Revenues and Operating Margin

Reynolds’ net sales increased 6.3% year over year to $2.05 billion due to higher sales in all its segments. Quarterly net sales beat the Zacks Consensus Estimate of $1.98 billion by 3.5%.

Adjusted operating income went up 15% to $765 million due to higher pricing of moist snuff and cigarettes.

Segment Details

RJR Tobacco: Segment revenues increased 2.8% to $1.60 billion, backed by higher market share of brands like Camel and Pal Mall.

Volumes declined 2.4% in the segment due to shift in demand toward smoke-free alternatives. RJR Tobacco’s market share declined 0.5 percentage points (pp) year over year to 26.1% due to a decline in market share in non-core brands.

Although volumes declined and tough industrial conditions prevailed, Camel brand performed well. While Camel’s market share increased 0.1 pp to 10.1%, that of Pall Mall went down 0.1 pp to 9.3%.

Compared with the year-ago quarter, the segment’s adjusted operating income climbed 22% to $588 million, as higher pricing and lower operating cost (in the form of completion of tobacco quota buyout) offset a volume decline.

American Snuff: Segment revenues increased 9.2% year over year to $201 million driven by market share gains.

The moist snuff market share slipped 0.2 pp year over year to 34.5%. The brand benefited from strong demand for Grizzly’s pouch styles and Wintergreen offerings.

Adjusted operating income rose 16.7% year over year to $118 million, driven by higher promotional spending.

Santa Fe: Segment revenues jumped 26.7% year over year to $171 million backed by higher volume.

The segment’s super premium brand Natural American Spirit’s volume inflated 23.3% year over year, and market share went up 0.3 pp year over year to 1.8%.

Adjusted operating income increased 41.9% year over year to $92 million, driven by pricing and volume gains in the super premium cigarette category.

Other Financial Update

Reynolds' pending merger with Lorillard Inc. is getting delayed due to further Federal Trade Regulation probes on anti-trust concerns. However, the merger was approved by shareholders of both the companies in Jan 2014. Last year, in July, Reynolds entered into an agreement to take over rival Lorillard for $68.88 per share or $27.4 billion, including assumption of net debt. Reynolds is confident of closing the deal by mid-2015.

Reynolds completed the nationwide expansion of its e-cigarette Vuse during the quarter.

2015 Guidance

Reynolds American issued the fiscal 2015 guidance. The company expects earnings growth in the range of 6.7% to 11% from the fiscal 2014 level.

Reynolds carries a Zacks Rank #2 (Buy). Better-ranked stocks in the tobacco sector are Altria Group Inc. (MO - Free Report) , Lorillard Inc. . Both these stocks have a Zacks Rank #2 (Buy). Another stock in the consumer staples sector is Tyson Foods Inc. (TSN - Free Report) also carrying a Zacks Rank #2.

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