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Smoking Hot Q1 Tobacco Earnings Ahead? RAI, MO

Almost 132 of the total S&P 500 members have already reported earnings for the first quarter. Many of these companies have outperformed the Zacks Consensus Estimate for both earnings and revenues. The results of these companies have been surprising analysts and investors alike as they have turned out to be not as bad as expected.  

As per the Zacks Earnings Trend, the first-quarter earnings scenario is encouraging as results for approximately 77.3% of the S&P companies that have reported so far have outperformed earnings estimates.

The widespread beat during the quarter can be explained by conservative estimates after analysts lowered their expectations following a disappointing fourth-quarter 2015. The sharp deceleration in equity prices, the widening credit of banking stocks and the slump in oil prices hurt investor’s sentiments. This is echoed by the Zacks Earnings Trend, which predicts a 9.4% decline in Q1 earnings on a 0.8% drop in revenues.

In spite of the declining trend, the tobacco sector is smoking hot in this quarter. When the entire world is anti smoking, cigarette companies are on fire. Lower gas prices, an improving job scenario and increasing consumer confidence came as economic boons, and did the trick for these stocks. Plus, these companies will always benefit from the addictive nature of tobacco.

Further, to maintain share in the developed countries, the tobacco biggies have resorted to innovation in the form of e-cigarettes and Reduced Risk Products (RRP) to mitigate losses from an increasing number of quitters. This is particularly interesting as, per the latest report by the Centers for Disease Control and Prevention on tobacco, high school and middle school students have been smoking fewer cigarettes and cigars in recent years and have been switching to e-cigarettes. Let’s take a look at what’s in store for the two tobacco majors scheduled to release their first-quarter numbers this week.

We expect leading tobacco maker Altria Group Inc. MO to beat expectations when it reports first-quarter 2016 results before the market opens on Apr 28. It has an Earnings ESP of +1.47% and a Zacks Rank #2 (Buy). Meanwhile, the Zacks Consensus Estimate for first-quarter earnings is pegged at 68 cents.

Last quarter, the company posted a negative earnings surprise of 1.47%. In the trailing four quarters, the company posted an average earnings beat of 0.40%.

Strong pricing and high volumes boosted Altria’s revenues in 2015. The company expects the trend to continue in the first quarter of 2016 as well.

Altria is presently focusing on boosting growth at its e-cigarette category and less harmful alternative tobacco products, which is in line with changing consumer preferences. In fiscal 2015, the Marlboro owner stepped up innovation and expanded the distribution of MarkTen XL e-vapor products and Green Smoke e-cigarettes in several lead markets which should drive sales in the to-be-reported quarter. Further, in Nov 2015, its subsidiary, PM USA expanded the distribution of Marlboro Midnight Menthol nationally, offering adult smokers a bold menthol flavor. It was received well in the market and is expected to boost the top line in the to-be-reported quarter. (Read more: Altria: A Beat in Store This Earnings Season?)

Reynolds American Inc. RAI is set to report first-quarter 2016 results on Apr 26, before the opening bell. It has an Earnings ESP of 0.00% and a Zacks Rank #2. The Zacks Consensus Estimate for first-quarter earnings is pegged at 50 cents. Last quarter, the cigarette company posted a negative surprise of 4.00%.

In the trailing four quarters, earnings outperformed the Zacks Consensus Estimate by an average of 3.00%.

Product innovation should help Reynolds counter persistent volume decline. Moreover, the company is increasing its focus on the e-cigarette category which is gaining popularity, especially among youngsters. Its e-cigarette brand, Vuse, has boosted the top line in the past and is likely to continue doing so in the quarter to be reported. With its nationwide distribution completed during 2015, the company expects the brand to contribute more toward top-line growth in the first quarter.

However, consumers are, on average, shifting from tobacco products amid accelerating cigarette prices, which combined with the worldwide anti-tobacco campaigns, may affect volumes in the first quarter. (Read more:Reynolds Q1 Earnings: A Surprise in the Cards?)

Stay tuned! Check later on our full write-up on earnings releases of these stocks.

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