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Actionable news in RAI: REYNOLDS AMERICAN Inc,

Reynolds American's stock to reach $55 in medium term

I remain upbeat about the shares of Reynolds American, a US-based manufacturer of tobacco products. The company’s financials for the second quarter of 2016 were decent. Net revenues increased 33% y-o-y to $3.19 bn, driven by higher sales across all the segments, but missed consensus estimate of $3.29 bn. Cigarettes shipment rose 25.7% due to the addition of the Newport brand with the Lorillard acquisition, and the company’s combined retail market share of Newport, Camel and Pall Mall increased 0.1 percentage points y-o-y to 32.2%. The Camel brand continued to perform well though its market share remained flat at 8.3%. Pall Mall’s market share declined 0.2 pp to 7.7%, and market share of Newport, the leading menthol brand, increased 0.5 pp to 13.9% on new retail contracts. Adjusted operating income jumped 45% to $1.46 bn on the back of higher pricing of moist snuff and cigarettes. Adjusted earnings per share grew 13.7% to 58 cents but fell short of analysts’ average projection of 61 cents.

During Q2 conference call, Reynolds announced a dividend hike of 9.5%. The annualized dividend paid by the company is now $1.84 per share, which offers a healthy dividend yield of 3.6%. Besides, Reynolds’ management approved a new $2 bn share repurchase plan, which is intended to be completed by 2018. The company also narrowed its full-year 2016 EPS guidance and expects it in the range of $2.26-2.35, which represents growth of 14.1-18.2% over $1.98 in 2015.

I believe that Reynolds’ impressive brand portfolio of tobacco products will help it to maintain strong business momentum and generate solid profits. Further, the company invests continuously in innovation and brand, which has helped it maintain its leading position in the industry. Besides, Reynolds is increasing its focus on the e-cigarette category, which is increasingly gaining popularity, especially among youngsters.

Shares of Reynolds have rebounded after a significant decline and are trading above $50 support level. I expext the stock to continue to rebound, with medium-term target at $55.

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