Can Reynolds (RAI) Keep the Earnings Streak Alive? - Analyst Blog

Reynolds American Inc.RAI is set to report first-quarter 2014 results on Apr 23, before the opening bell. Last quarter, the company posted a 5.2% positive earnings surprise. Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Reynolds is likely to beat earnings because it has the right combination of two key ingredients:

Positive Zacks ESP: Reynolds has an Earnings ESP of +2.70%. It represents the difference between the Most Accurate estimate (76 cents) and the Zacks Consensus Estimate (74 cents). This is a meaningful and leading indicator of a likely positive earnings surprise for shares.

Zacks Rank: Reynolds carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement. 

The combination of Reynolds' Zacks Rank #3 and +2.70% ESP makes us confident about a positive earnings beat on Apr 23.

What is Driving the Better-than-Expected Earnings?

Reynolds' product innovations and cost reduction initiatives will help it to combat the continuous volume decline. Therefore, we are expecting the company to post modest profit and overall decent first-quarter results.

Management is optimistic about the first quarter and expects earnings to be up 3.5% to 8.2% from prior-year quarter's $3.19. Moreover, the tobacco maker strictly manages its costs. A business analysis conducted by Reynolds in the fourth quarter of fiscal 2013 found productive ways to reduce cost and channelize its resources. This is expected to further boost profits, going ahead.

Moreover, the company is expected to witness better top line results in the coming quarter backed by its expanded distribution of its patented vapor technology in the new e-cigarette brand Vuse. Reynolds launched the brand in two varieties – Vuse Solo and Vuse System – in Colorado in 2013. It is currently expanding the distribution of the brand in other states as well

Other Stocks to Consider

Here are some other companies that investors may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Coca Cola Enterprises Inc. CCE, Earnings ESP of +2.27% and a Zacks Rank #2 (Buy).

The Cheesecake Factory Incorporated CAKE, Earnings ESP of +2.04% and a Zacks Rank #3.

 Church & Dwight Co. Inc. CHD, Earnings ESP of +1.37% and a Zacks Rank #3.