Reynolds American (RAI) Q1 Earnings, Sales Lag Estimates

Reynolds American Inc. (NYSE:RAI) delivered lower-than-expected first-quarter 2017 results, wherein both the company’s top and bottom lines missed estimates but increased on a year-over-year basis.

Shares of Reynolds lost 0.4% during the pre-market trading hours. We note that this Zacks Rank #4 (Sell) stock was up 7.0% over the past three months, compared with the Zacks categorized Tobacco industry’s gain of 5.6%.

The company posted adjusted earnings of 56 cents per share that lagged the Zacks Consensus Estimate by a penny but rose 12% from the prior-year quarter. The year-over-year surge was driven by increase cigarette and moist-snuff pricing, double-digit increases in operating income of both Santa Fe and American Snuff segments, coupled with a lower tax rate.

On a GAAP basis, earnings per share came in at 55 cents, plunging more than 77% from $2.49 earned in the year-ago quarter. This consisted of a significant gain on divestiture from the sale of the international rights to the Natural American Spirit brand.

Revenues and Operating Profits

Reynolds’ net sales improved 1.1% year over year to $2,949 million, driven by higher sales across the Santa Fe and American Snuff segments. However, the same missed the Zacks Consensus Estimate of $3,039 million.

The company recorded operating income of $1,346 million that rose 2% from the prior-year quarter. Further, operating margin rose 0.4 percentage points (pp) to 45.6%. Double-digit increase in operating income in Santa Fe and American Snuff segments more than offset the decline in operating income in RJR Tobacco segment.

Segment Details

RJR Tobacco: Net sales dipped 1.7% to $2,371 million. The segment’s operating profit came in at $1,090 million, down 2.8% from the prior-year quarter.

The segment’s cigarette shipments declined 5% year over year in the quarter. On adjusted basis, the same decreased nearly 2.5%. Further, retail market share fell 0.3 pp to 32.2%.

The company’s Newport brand has been performing well, with a rise of 0.1pp to 14.1% in the retail market share. Further, Camel’s market share was flat year over year at 8.2%. Also, the Camel brand is gaining from the national expansion of the four Turkish Blend styles along with Camel Jade, an additional menthol style.

Moreover, Pall Mall brand’s market share declined 0.2 pp year over year to 7.7%. Notably, the brand has enhanced its portfolio by adding two styles, namely, Pall Mall Classic Menthol Silver Box and Pall Mall Classic Menthol Silver Box 100s.

During the reported quarter, R.J. Reynolds Tobacco Company submitted over 450,000 pages of documentation with regard to its Modified Risk Tobacco Product (MRTP) applications to the U.S. Food and Drug Administration (FDA).

Santa Fe: Revenues jumped 9.2% year over year to $238 million owing to the rise in pricing and volumes of the Natural American Spirit brand. The segment’s operating income rose 17.1% to $144 million in the quarter. Operating margin inflated 4.1 pp to 60.5%.

The segment’s super premium brand – Natural American Spirit – also witnessed a 5.4% increase in volume, while its market share went up 0.2 pp to 2.3%.

American Snuff: Revenues grew 12% year over year to $242 million supported by higher volumes. Further, the segment’s operating income increased 18.8% to $157 million in the quarter. Operating margin increased 3.7 pp to 65%.

Notably, the segment’s Grizzly brand performed well in the quarter gaining from supply disruption of competitive items coupled with the national expansion of its Dark Mint style. Its retail market share increased 1.0 pp to 31.8% as well. Moreover, Grizzly’s volume grew 4.5% in the quarter.

Other Developments

Reynolds has got the antitrust approvals in the U.S. and Japan, with regard to the proposed merger with British American Tobacco (LON:BATS) Plc (NYSE:BTI) . The deal is expected to conclude in the third quarter of 2017.

Other Financial Update

Reynolds exited the first quarter with cash and cash equivalents of $3,154 million compared with $2,051 million in the year-ago quarter.

Long-term debt (less current maturities) was $12,651 million as of Mar 31. Further, management hiked its quarterly dividend by 10.9% to 51 cents per share in the reported quarter.

Stocks to Consider

Better-ranked stocks in the Consumer Staples sector include Energizer Holdings, Inc. (NYSE:ENR) and Blue Buffalo Pet Products (NASDAQ:BUFF) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Energizer Holdings, with a long-term earnings growth rate of 9.8%, has surged 26.4% in the past year.

Blue Buffalo Pet Products, with a long-term earnings growth rate of 17.5% has increased 6.5% in the past month.

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