Earnings Preview: Reynolds American Inc. 2009 3Q

Source from:  The Associated Press 10/21/2009

Reynolds American Inc. reports its third-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. It also owns Conwood Co., which makes Kodiak and Grizzly brand smokeless tobacco. Reynolds, based in Winston-Salem, N.C., is looking to grow market share and aggressively promotes its brands. Flagship brand Camel held 7.5 percent of the cigarette market in the second quarter, in line with a year earlier. Pall Mall's share climbed 2.6 percentage points to 5.2 percent. The company's second-quarter profit climbed 4 percent because it raised prices and cut costs as sales volumes slipped and a 62-cent-per-pack federal tax took hold. BY THE NUMBERS: Analysts surveyed by Thomson Financial on average expect Reynolds to post a profit of $1.17 per share for the third quarter on revenue of $2.19 billion. In the third quarter a year ago, Reynolds reported earning $1.19 per share on revenue of $2.25 billion. ANALYST TAKE: Analysts expect the third quarter to be the first indicator of true cigarette volumes after declines in the first half of the year as the federal tax increase took effect April 1. Credit Suisse analyst Thilo Wrede wrote in an Oct. 13 note to investors that the strength of Pall Mall could continue to offset declines in Reynolds' other brands. In an earlier note, Wrede said that the brand may be stronger than initially believed. "The promotions for Pall Mall appear to be more permanent in nature than initially thought and, even though we still believe that they do not maximize the short-term profit of the brand, we now see them as a successful - and profitable - long-term investment," Wrede said. Wrede said he believes Reynolds' Grizzly brand is withstanding pricing competition better than expected but questioned whether the brand will be able to sustain if others like Altria Group Inc. permanently lower prices. WHAT'S AHEAD: The industry continues to see the effect of the U.S. Food and Drug Administration gaining the authority in June to regulate tobacco. Reynolds and others opposed the legislation because it believed tighter regulations on marketing and product introductions could cement Altria's position as market leader. Reynolds joined with Lorillard Inc. and smaller tobacco companies in a lawsuit in federal court in Kentucky challenging some marketing restrictions of the new law. Wall Street will look at how smoking bans, tax increases and further regulation could affect cigarette volumes and profitability. STOCK PERFORMANCE: During the quarter that ended Sept. 30, shares of Reynolds rose about 13.5 percent to $44.52. Over the last 52 weeks, the stock has traded between $31.55 and $50. Enditem