Tags: Reynolds | American | smoking | RAI

Reynolds American Moving to Alternatives as Smoking Declines

By    |   Wednesday, 29 August 2012 03:29 PM

Reynolds American (RAI) is moving into alternative tobacco products to offset declines in cigarette smoking in its principal market, the United States. Analysts applaud the move to more profitable products but warn the brand is susceptible in a weak economy.

Reynolds American is a holding company whose operating subsidiaries include the second-largest cigarette manufacturer in the United States, R.J. Reynolds; the second-largest smokeless tobacco products manufacturer in the United States, American Snuff Company; the manufacturer of the fastest growing super-premium cigarette brand, Santa Fe Natural Tobacco (SFNTC); and Niconovum AB.

RAI’s reportable operating segments are RJR Tobacco, American Snuff and Santa Fe. RAI’s largest reportable operating segment, RJR Tobacco, owns brands that include many of the best-selling cigarettes in the United States, including Camel, Pall Mall, Winston, Kool, Doral and Salem. Those brands, and its other brands, including Misty and Capri, are manufactured in a variety of styles and marketed in the United States.

“RAI’s strategy is focused on transforming tobacco in anticipation of shifts in consumer preferences to deliver sustainable earnings growth, strong cash flow and enhanced long-term shareholder value,” management said in a recent filing.

“This transformation strategy includes growing the core cigarette and moist-snuff businesses, focusing on innovation, including modern smoke-free tobacco, such as Camel Dissolvables, exploring nicotine replacement treatments and other opportunities for adult tobacco consumers while maintaining efficient and effective operations.”

Reynolds American has a market cap of $26 billion in a sector, tobacco, where the average company size is $5.98 billion. Its trailing 12-month P/E ratio is 18.77 and its five-year projected price-to-earnings-growth (PEG) ratio is 2.56, compared to 2.07 for the sector.

Its projected earnings per share growth for the coming year is 6.42 percent, compared to a sector average of 9.71 percent.

Core growth

Analysts are mixed, with buy or outperform calls from Smith Barney and Jefferson Research while most of the major institutions are neutral on the tobacco stock.

“Although we see income from American Snuff helping drive profits as higher-margin smokeless tobacco growth slightly offsets declining cigarette sales, we think the core cigarette business will underperform peers due to RAI's still heavy exposure to brands vulnerable to trade down,” Standard & Poor’s analysts wrote on July 24, rating the stock a hold.

“As an offset, RAI continues to rationalize its operations to focus on core growth categories.”

Reynolds American next reports on Oct. 23.

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