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Optimistic Reynolds raises forecast on earnings
Lower volume, higher taxes not a deterrent
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Published: October 23, 2009
Updated: 10/23/2009 09:09 am
Raising an earnings forecast while dealing with a decline in cigarette shipments and higher excise taxes on tobacco products may appear ambitious for Reynolds American Inc.
But Reynolds management said yesterday that it considers increasing its full-year projections to a range of $4.60 to $4.70 a share -- from $4.40 to $4.60 -- as a sign of confidence in its strategies and its Camel, Pall Mall and Grizzly brands.
It is the second consecutive quarter that Reynolds has upped the forecast, which excludes any trademark-impairment charges, but includes a 40-cent charge for increased pension expenses.
Reynolds also reported a profit of $362 million in the third quarter, up 72 percent from a year ago. The net-income surge, however, is skewed in part because the company took a combined $264 million in trademark-impairment and restructuring charges in the third quarter of 2008.
"This year has been marked by unprecedented increases in excise taxes on tobacco products, an extremely weak economy, and intense competitive activity," said Susan Ivey, the chairwoman, president and chief executive of Reynolds.
In April, the federal excise tax was raised 62 cents to $1.01 a pack. Some states also raised their excise tax this year, with North Carolina going up 10 cents to 45 cents a pack.
The cigarette-shipment volume for subsidiary R.J. Reynolds Tobacco Co. fell 11 percent in the quarter to 20.6 billion. Reynolds said that the industry decline was 12.6 percent.
"The strength of our strategies and our operating companies' brands has allowed us to continue to perform well even in these difficult times," Ivey said.
Reynolds also recently raised the list price on its cigarette brands between 41 cents and 78 cents a pack for wholesale customers.
Daniel Delen, the chairman, president and chief executive of Reynolds Tobacco, said that the price increases, along with lower promotional costs and productivity gains, "largely offset the impact of lower cigarette volume and higher pension expense."
Joe Magyer, an analyst for The Motley Fool, a financial-services company, said that raising the earnings forecast appears to be a bold move on the surface. "But these guys generate plenty enough cash to cover," he said.
Reynolds posted diluted earnings of $1.24 a share, up 52 cents from a year ago. The average forecast was $1.17 by analysts surveyed by Zacks Investment Research.
Reynolds' share price fell 6 cents to close at $48.98 yesterday.
Stephen Pope, the chief global-market strategist with Cantor Fitzgerald Europe, said he remains concerned about the decline in cigarette volume.
"I wonder what Reynolds will pull out of the tobacco pouch to be able to justify raising the full-year profit outlook," Pope said. "I guess a great deal of expectation is being placed upon the on-going success of Conwood in the snuff market."
Reynolds said it had a slight market-share drop in cigarettes to 28.2 percent. The market share for Camel, the lead Reynolds cigarette brand, dipped slightly to 7.7 percent. Pall Mall's market share was at 5 percent, up 2.3 percentage points from a year ago.
A temporary price discount in the spring on Pall Mall attracted smokers wanting to spend less on cigarettes in the recession. Even after the discount ended in May and prices were raised to counter the excise-tax increases, Pall Mall maintained a higher market share.
The company began another discount promotion for Pall Mall this month.
In the increasingly competitive moist-snuff category, Grizzly expanded its market share to 25.6 percent, up 2.1 percentage points, according to data from Management Science Associates Inc., a research group. Conwood's overall market share was up 1.9 percentage points to 29.9 percent.
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