What's In Store For Reynolds American (RAI) In Q1 Earnings?

Reynolds American, Inc. (NYSE:RAI) is set to report first-quarter 2017 results before the opening bell on May 3. The question lingering in investors’ minds is, whether the tobacco maker will be able to maintain its positive earnings surprise streak in the to-be-reported quarter. We note that the company has outpaced the Zacks Consensus Estimate in one of the trailing four quarters, posted negative surprise in two and in line in the remaining one, with an average negative surprise of 1.6%.

Coming to the share price movement, the stock not only outperformed the Zacks categorized Tobacco industry but also the broader Consumer Staple sector over the past one year. Reynolds American’s shares rallied 29.9% over the past one year, higher than the Zacks categorized Tobacco industry’s growth of 16.2% and sector’s growth of 3.1% in the same time frame.

The industry is part of the bottom 24% of the Zacks Classified industries (64 out of the 265). On the contrary, the broader sector is placed at the bottom 38% of the Zacks Classified sectors (10 out of 16).

Let’s delve deeper how things are shaping up for this announcement.

Which Way Are Estimates Treading?

Let’s look at earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company right before the earnings release. The current Zacks Consensus Estimate for the quarter under review has remained unchanged over the past 30 days and is currently pegged at 57 cents, up 13.6% from 50 cents delivered in the year-ago quarter.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Reynolds American is likely to beat earnings estimates this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Reynolds American has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate is 57 cents. Reynolds American has a Zacks Rank #3, which increases the predictive power of ESP. However, we also need a positive ESP for an earnings beat.

Factors Driving the Company

Increased competition in the vapor category, declining volumes due to general shift of consumption away from tobacco products and higher taxes and strict anti-smoking regulations are expected to hurt the to-be-reported quarter.

Meanwhile, we note that Reynolds reported positive surprise during fourth-quarter 2016, after reporting negative surprises in the preceding two quarters. However, Reynolds is losing share in Moist Snuff segment and the performance of Camel brand also remains under pressure.

Despite high excise tax and anti-smoking regulations, we are impressed with the cigarette maker’s strong brand portfolio, shift to low-risk, smokeless tobacco products, cost reduction initiatives and strong pricing. The Newport brand, added to the company’s portfolio post Lorillard acquisition, has enhanced its position in the industry. Newport's expanded presence is helping the company boost its top line.

Further, investors are looking forward toward the highly anticipated merger between Reynolds and British American Tobacco (LON:BATS) Plc (NYSE:BTI) signed in Jan 2017. The combined entity will own a global portfolio including next generation products and strong cigar brands including Kent from British American Tobacco and Camel, Newport and Pall Mall from Reynolds.

Further, the combined company will benefit from Reynolds’ strong position in the alternative tobacco and next-generation product development, and R&D capabilities. Consequently, the newly merged entity can develop an innovative pipeline of vapor and tobacco-heating products. The merger is expected to complete in third-quarter 2017.

Stocks to Consider

Here are some companies in the Consumer Staple sector you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Treehouse Foods, Inc. (NYSE:THS) has an Earnings ESP of +4.62% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Colgate-Palmolive Company (NYSE:CL) has an Earnings ESP of +1.39% and a Zacks Rank #2.

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