Earnings Preview 2Q: Reynolds American Inc.

Source from:  AP 07/22/2009

Reynolds American Inc. reports its second-quarter results on Thursday. The following is a summary of key developments and analyst opinion related to the period. OVERVIEW: The nation's second-biggest cigarette company offers such brands as Camel, Pall Mall and Natural American Spirit. Reynolds, based in Winston-Salem, N.C., also owns Conwood Co., which makes Kodiak and Grizzly brand smokeless tobacco. During the first quarter, the U.S. tobacco industry saw cigarette volumes drop as retailers and wholesalers cut their orders ahead of a one-time federal tax on their inventory. Tobacco sellers had to pay a "floor" tax of 62 cents per pack on whatever they had on hand before a 62-cent-per-pack retail sales tax went into effect April 1. Tobacco makers have until July 31 to make those payments on product that was ready for distribution. BY THE NUMBERS: Analysts surveyed by Thomson Financial on average expect Reynolds to post a profit of $1.16 per share for the second quarter on revenue of $2.27 billion. That compares with a second-quarter profit last year of $1.24 on revenue of $2.34 billion. ANALYST TAKE: Analysts expected a short-term impact in earnings for the first half of the year stemming from the federal tax increase. Goldman Sachs analyst Judy Hong told investors in a research note on July 5 that cigarette volume declines have eased since April 1, suggesting retailers have gone back to ordering cigarettes and consumers have adjusted to the higher prices that include the new tax. Meanwhile, smokeless tobacco industry volumes trends appear to have softened, Hong wrote. Citing AC Neilsen numbers, Hong wrote that Reynolds growth in the segment remains "very resilient and robust." Stifel Nicolaus & Co. analyst Christopher Growe wrote in a note to investors on June 30 that U.S. tobacco profits are improving in the short term but could be challenged by additional state excise tax increases, Food and Drug Administration regulation and smoking bans. WHAT'S AHEAD: The entire industry continues to see the impact of the FDA's new authority to regulate tobacco. It is believed the regulation will hurt Philip Morris USA least because the tighter regulations on marketing and new product introductions could cement its position as market leader. Wall Street will be looking at how further smoking bans, tax increases and regulation could affect cigarette volumes and profitability. STOCK PERFORMANCE: During the quarter ended June 30, shares of Reynolds rose about 3.3 percent to end the period at $38.62. Over the last 52 weeks, the stock has traded between $31.55 and $57.73. Enditem