COMPANY DESCRIPTION

Reynolds American is a holding company whose operating subsidiaries include a cigarette manufacturer, R. J. Reynolds Tobacco Company; a smokeless tobacco products manufacturer, American Snuff Company, LLC; the manufacturer of the cigarette brand, Santa Fe Natural Tobacco Company, Inc.; Niconovum AB and Niconovum USA, Inc., marketers of nicotine replacement therapy products; and R.J. Reynolds Vapor Company, a manufacturer and distributor of digital vapor cigarettes. Co.'s operating segments are: RJR Tobacco, which includes several cigarettes brands such as CAMEL and PALL MALL; American Snuff, which brands include GRIZZLY and KODIAK; and Santa Fe, which brand include NATURAL AMERICAN SPIRIT. 

 

ECONOMIC MOAT

RAI’s moat is dug by the addictive nature of cigarettes, the strength of portfolio of brands, and the scale of operations. Reynolds' few growth opportunities is in its American Snuff smokeless tobacco, a segment that has been growing for several years. We expect it to continue its growth for several years as smokeless tobacco provides a more socially acceptable alternative to cigarettes.

 

OUTLOOK

The fate of the Reynolds American and Lorillard merger is now in the hands of the Federal Trade Commission. The company issued positive guidance for profits. Management's earnings-per-share range for 2015. The expansion of vapor products will be a major growth driver in the years ahead. The electronic cigarette market in the U.S., now estimated at about $3 billion. The stock is trading at fair value and the dividend yield is below historical levels.

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STRENGTHS

  • Strong foothold in the growing smokeless tobacco market in the US

  • Growth momentum in Camel and Pall Mall brands

  • Strong brand portfolio 

WEAKNESSES

  • Overexposure to the declining US cigarette market

  • RAI's involvement in numerous litigations 

THREATS

  • Increasing excise taxes

  • Stringent regulations on manufacturing and sales of tobacco products

  • Counterfeit cigarettes and growing illicit trade 

OPPORTUNITIES

  • Growing demand for electronic cigarettes

  • Growing snus and other smoke-free tobacco products market 

The above report is for information purposes only, and is not a solicitation or offer to buy or sell any securities. Past performance is no guarantee of future performance. Neither diversification nor asset allocation ensures a profit or guarantees against loss. Before investing, investors should consider their risk tolerance, investment objectives, time horizon, available capital, and charges and expenses.  

 

The information presented in this report has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guranteed. All material is subject to change without notice. The views and opinions expressed are those of Focused Stock Research and/or WALT ST Investment Management, Ltd. and in no way reflect the views and opinions of Investment Consultants nor their Broker Dealers.

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