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Tobacco Stocks Slip On $23.6 Billion Verdict; Analysts Weigh In

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Monday's pre-market marks the first trading since a Florida jury awarded the widow of a long-time smoker $23.6 billion in punitive damages on top of $16.8 million in compensatory damages in a suit against Reynolds American (NYSE: RAI).

Although this decision is likely to be overturned when appealed, the Street has not reacted favorably.

Shares of Reynolds dropped as much as four percent from Friday's close before getting a little relief. Reynolds is not the only tobacco stock trading down on the news: Lorillard (NYSE: LO), Altria Group (NYSE: MO) and Phillip Morris (NYSE: PM) have dipped ~1.3, ~0.7 and ~0.48 percent, respectively, in Monday's session.

Stifel analyst Christopher Growe said that the verdict appears to "complicate" the Reynolds acquisition of Lorillard in the short-term during the appellate process.

Speaking on the acquisition, Morgan Stanley analyst David Adelman said Reynolds only generates attractive returns on the deal if you take an "extremely long-term" view. He said for a tobacco acquisition to be successful, the buyer needs to realize "substantial" cost synergies or accelerate top-line growth.

Looking at each companies position in the deal, Adelman said he understands both Lorillard's and Imperial's decision but is less supportive of Reynolds. He commented, "When looking at the purchase and the sale, Reynolds is essentially purchasing Newport at 13.1 x and 15.8 x EV/EBITDA with and without $300 million in synergies, respectively."

Latest Ratings for RAI

DateFirmActionFromTo
Aug 2014Morgan StanleyUpgradesUnderweightEqualweight
Jul 2014RBC CapitalUpgradesOutperformTop Pick
Jul 2014RBC CapitalUpgradesSector PerformOutperform

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Posted-In: Christopher Growe David Adelman Morgan Stanley StifelAnalyst Color News Legal Analyst Ratings

 

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