Morgan Stanley's Outlook On Reynolds Unchanged After Q3 Miss

Reynolds American, Inc. RAI reported its EPS for Q3 below the consensus forecast, reflecting modestly lower pricing and volumes, along with several temporary unfavorable cost dynamics.

Morgan Stanley’s Matthew Grainger maintained an Equal-weight rating on the company, with a price target of $52.

Q3 Results

Reynolds American reported its Q3 EPS at $0.61, driven by a shortfall in revenue and EBIT growth at RJR. However, Grainger mentioned that the weakness was sue to several temporary factors that were likely to moderate in Q4.

“Q3 reflected a slight shortfall on cigarette volumes, as well as optically lower pricing, which still increased 5 percent,” the analyst stated, while adding that the company also saw temporary higher costs during the quarter.

Guidance

Reynolds American narrowed its EPS guidance for 2016 to $2.27-$2.33, which Grainger believes implies a relatively wide EPS range for Q4, while providing the company increased flexibility, against the backdrop of softer industry volumes and persisting regulatory investment in Q4.

The company now expects industry volumes to decline 2.0-2.5 percent in 2016, reflecting softer trends in Q3.

“We expect 2017 results to reflect normalizing cigarette volumes, consistent pricing and increasing cost savings realization,” the analyst stated.

Reynolds American also finalized its succession plan, naming the current COO of RJR, Debra Crew, as the CEO, effective January 1.