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Reynolds American (RAI) Stock Lacks Luster: What Lies Ahead?

Reynolds American Inc. RAI is going through a tough time as evident from its dismal earnings and sales surprise history, along with increasing competition in the vapor category, higher excise tax, declining tobacco volumes and strict anti-smoking regulations.

Shares of this Zacks Rank #4 (Sell) company have increased 0.9% in the last three months, compared with the Zacks categorized Tobacco industry’s gain of 2.8%. Currently, the industry is placed at bottom 16% of the Zacks Classified industries (215 out of 256). To add up to the gloomy picture, the stock exhibits a Momentum Score of “D”. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



We note that Reynolds American is investing heavily to promote the e-cigarette brand VUSE that may pressurize margins in the near term. The company might also face margin pressure owing to pricing power of other major tobacco players in the industry such as Philip Morris International Inc. PM and Altria Group, Inc. MO.

Meanwhile, the tobacco industry has been facing many challenges that is denting the company’s performance. The restrictions imposed on tobacco companies are lowering cigarette consumption. In fact, the U.S. Food and Drug Administration has made it mandatory for tobacco companies to use precautionary labels on cigarette packets to dissuade customers from smoking. These regulations adversely impact the company’s top line and, in turn, its overall profitability.

A glimpse of the company’s performance shows that its earnings have missed the Zacks Consensus Estimate in four of the last six quarters. Moreover, it has delivered an average negative earnings surprise of nearly 2% in the trailing four quarters. Also, its top line has lagged the consensus mark in five of the six consecutive quarters, primarily due to decrease in tobacco volumes.

Reynolds American’s Acquisition

We remain encouraged by the acquisition of Reynolds American by British American Tobacco p.l.c. BTI that is anticipated to close in the third quarter of 2017. Under the terms of the buyout, announced in Jan 2017, British American will take over the remaining 57.8% of Reynolds American for $49 billion. The deal comprises of $29.44 cash and a number of British American Tobacco American Depositary Shares representing 0.5260 of British American’s ordinary share.

Notably, the combined entity is likely to further strengthen the tobacco industry and benefit from Reynolds American’s strong position in the alternative tobacco and next-generation product development as well as R&D capabilities. Additionally, the new merged entity can develop an innovative pipeline of vapor and tobacco-heating products.

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Altria Group (MO): Free Stock Analysis Report
 
Philip Morris International Inc (PM): Free Stock Analysis Report
 
Reynolds American Inc (RAI): Free Stock Analysis Report
 
British American Tobacco p.l.c. (BTI): Free Stock Analysis Report
 
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