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Reynolds - growth trend continues

Reynolds American, a US-based manufacturer of tobacco products, issued decent results for the third quarter of 2015. Revenues increased 41.1% y-o-y to $3.16 bn and surpassed consensus estimate of $3.08 bn. Volumes of cigarette shipments were up 30.2% benefiting from the addition of the Newport brand following the Lorillard acquisition. However, the company’s combined retail market share of Newport, Camel and Pall Mall brands (on a pro-forma basis) shrank 0.1 percentage points to 32%. Adjusted operated income jumped 64.9% to $1.41 bn, and operating margin advanced 6.4 percentage points to 44.4%. Adjusted earnings per share rose 17% to 55 cents and coincided with analysts’ average projection. A quarterly dividend was 36 cents per share (up 7.5% y-o-y), which offers solid annualized dividend yield of 2.94%.

Reynolds tightened its full-year 2015 guidance to reflect solid third-quarter results. The company now expects adjusted EPS within $1.94-2.00, compared with the previous $1.90-2.00 range. The new estimate implies y-o-y growth of 13-17%.

Reynolds, like its peers, has seen softening cigarette shipment volume trends for the past few quarters, due to a general shift away from tobacco products resulting from accelerating prices of cigarettes and worldwide anti-tobacco campaigns. The company is thus putting greater focus on the growing electronic cigarettes to boost sales. Reynolds completed nationwide expansion of its e-cigarette brand Vuse, which positively affected sales.

In September 2015, Reynolds and British American Tobacco joined forces to leverage their technological know-how to boost their presence in the unconventional cigarette space. Per the multi-year deal, the two companies will work on a joint research, development and technology-sharing framework for developing e-cigarettes through 2022.

In my opinion, Reynolds’ shares are well positiond to continue growth in the medium term. The nearest target price is $55.