Reynolds' (RAI) Q4 Earnings & Sales Miss Estimates; Up Y/Y

Reynolds American Inc.'s RAI share price rose 2.2% after it posted higher year-over-year fourth-quarter 2015 results. However, adjusted earnings of 48 cents per share missed the Zacks Consensus Estimate of 50 cents. Earnings improved 19.1% from the year-ago period backed 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 litigation and Non-Participating Manufacturer NPM Partial Settlement with two additional states.

 

Revenues and Operating Margin

 

Reynolds' net sales increased 43.1% year over year to $3.05 billion driven by higher sales in all the segments. Quarterly net sales, however, missed the Zacks Consensus Estimate of $3.06 billion.

Adjusted operating income surged 61.2% to $1.26 billion on the back of higher pricing of moist snuff and cigarettes.

Segment Details

RJR Tobacco: Segment revenues jumped nearly 51% to $2.52 billion on the back of market share gain by brands like Camel and Pall Mall.

Volumes rose 34.6% benefiting from the addition of the Newport brand following the Lorillard acquisition. RJR Tobacco's combined retail market share of Newport, Camel and Pall Mall remained flat year over year at 31.8%.

Camel continued to perform well though its market share remained flat at 8%. However, Pall Mall's market share went down 0.3 pp to 7.8%. Market share of Newport, the leading menthol brand, increased 0.6 pp to 13.6% backed by new retail contracts.

Compared with the year-ago quarter, the segment's adjusted operating income climbed 66.2% to $1.13 billion as a result of lower operating cost. Operating margin increased 4.1 percentage points (pp) to 44.6% backed by improved mix of premium cigarettes.

American Snuff: Segment revenues grew 11% year over year to $226 million supported by higher volumes.

The segment's sales volume outpaced industry volume growth and increased 6% year over year. The moist snuff market share gained 0.8 pp to 33.5%. The brand benefited from solid demand for Grizzly's pouch styles and Wintergreen offerings.

Adjusted operating income rose 13.9% year over year to $503 million gaining from higher pricing and volume. Operating margin increased 3.3 pp to 59.4% backed by improved mix of premium cigarettes.

Santa Fe: Segment revenues jumped 19.9% year over year to $211 million backed by higher volume.

The segment's super premium brand Natural American Spirit's volume inflated 18.4%, and market share went up 0.3 pp to 2%.

Adjusted operating income increased 22.9% year over year to $111 million, driven by pricing and volume gains in the super premium cigarette category.

Full-Year Results

Reynolds' adjusted earnings of $1.98 per share in full-year 2015 missed the Zacks Consensus Estimate of $2.00. Earnings improved 16% year over year supported by higher cigarette and moist snuff pricing.

Reynolds' net sales increased 26% year over year to $10.7 billion driven by higher sales in all the segments. Quarterly net sales, however, missed the Zacks Consensus Estimate of $10.06 billion.

Other Financial Update

During the fourth-quarter conference call, Reynolds also announced a dividend hike of 16.7%.

The company also completed the sale of $5 billion worth of Natural American Spirits business sale outside the U.S. In Sep 2015, Reynolds' subsidiary, R.J. Reynolds Tobacco Company, and British American Tobacco plc ("BAT") joined forces to leverage technological know-how to boost their presence in the unconventional cigarette space.

Per the multi-year deal, the two companies will work on a joint research, development and technology-sharing framework for developing e-cigarettes through 2022.

2016 Guidance

Reynolds American issued the full-year 2016 guidance. The company expects earnings within $2.25 to $2.35 on a split-adjusted basis, representing 13.6% to 18.7% growth from the year-ago tally of $1.98.

Reynolds carries a Zacks Rank #2 (Buy).

Stocks to Consider

Other well-ranked stocks in the consumer staple sector are Con Agra Foods Inc. CAG, Helen of Troy Inc. HELE and Keurig Green Mountain Inc. GMCR. All these stocks carry a Zacks Rank #2.

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