Reynolds American (RAI) Misses Q3 Earnings And Revenues

Reynolds American Inc.’s (NYSE:RAI) third-quarter 2016 adjusted earnings of 61 cents per share missed the Zacks Consensus Estimate of 64 cents by 4.7%. Nonetheless, the bottom line improved 10.9% from the year-ago quarter driven by higher cigarette and moist snuff pricing.

Adjusted earnings per share exclude charges associated with the transaction and financing cost, implementation cost and charges related to the Engle Progeny lawsuits, other tobacco-related litigations and Non-Participating Manufacturer (NPM) Partial Settlement with two additional states.

Revenues and Operating Margin

Reynolds’ net sales inched up 1.4% year over year to $3.20 billion, backed by higher sales across all the segments. Quarterly net sales missed the Zacks Consensus Estimate of $3.36 billion.

Adjusted operating income surged 11% to $1.6 billion on the back of higher pricing of moist snuff and cigarettes.

Segment Details

RJR Tobacco: Revenues improved nearly 1% to $2.65 billion driven by market share gain by brands like Camel and Pall Mall.

Shipment slipped 2.5% due to decrease in tobacco consumption. Market share was in-line with the prior-year quarter, at 32.3%. RJR Tobacco’s combined retail market share of Newport, Camel and Pall Mall increased 0.1 percentage points (pp) year over year to 29.9%.

The Camel brand continued to perform well though its market share remained flat year over year at 8.3%. However, Pall Mall’s market share declined 0.2 pp to 7.7%. Market share of Newport, the leading menthol brand, increased 0.4 pp to 13.9% on new retail contracts.

The segment’s adjusted operating income rose 8.7% year over year to $1.34 billion as a result of lower operating costs. Operating margin increased 3.7 pp to 50.4% buoyed by an improved mix of premium cigarettes.

American Snuff: Revenues grew 11.4% year over year to $234 million supported by higher volumes.

The moist snuff market share declined 0.4 pp and its retail market share decreased 0.4 pp to 30.7%. The brand benefited from the solid demand for Grizzly’s pouch styles and Wintergreen offerings.

Adjusted operating income rose 10.9% year over year to $134 million owing to higher pricing and volume. Operating margin increased 0.3 pp to 57% backed by improved mix of premium cigarettes.

Santa Fe: Revenues jumped 28.3% year over year to $154 million owing to higher volume.

The segment’s super premium brand – Natural American Spirit – witnessed a 10.8% increase in volume, while its market share went up 0.3 pp to 15.7%.

Adjusted operating income soared 27.7% year over year to $154 million on pricing and volume gains in the super premium cigarette category. Operating margin contracted 2.7 pp to 57.9%.

Other Financial Update

During the third-quarter conference call, Reynolds announced a new $2.0 billion share repurchase program, scheduled for completion by year-end 2018. In the third quarter, the company repurchased $75 million of its common stock.

Reynolds American exited the third quarter with cash and cash equivalent of $1.91 billion same as that in the previous quarter.

Long-term debt was $500 million compared to $13.2 billion in the preceding quarter.

2016 Guidance

Reynolds tightened its full-year guidance. Based on the third quarter performance, the company now anticipates earnings in the range of $2.27–$2.33 per share as against $2.26–$2.35 estimated earlier. Nevertheless, the guidance represents a growth of 14.6–17.7% over $1.98 per share in 2015.

Zacks Rank & Other Key Picks

Reynolds carries a Zacks Rank #4 (Sell). One can count on better-ranked stocks like Turning Point Brands, Inc. (NYSE:TPB) and 22nd Century Group, Inc. (NYSE:XXII) and Philip Morris International Inc. (NYSE:PM) .

Turning Points Brands sports a Zacks Rank #1 (Strong Buy) and has seen considerable upward estimate revisions over the past seven days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Philip Morris International and 22nd Century Group, both carry a Zacks Rank #2 (Buy) and their earnings are expected to grow by 9.2% and 20%, respectively, next year.

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