QUOTE AND NEWS
TheStreet.com  May 22  Comment 
NEW YORK (TheStreet) -- Reynolds American shares are up 0.2% to $75.64 in early market trading on Friday as the cigarette manufacturer is expected to receive regulatory approval for its proposed merger with Lorillard from the Federal Trade...
SeekingAlpha  May 22  Comment 
newratings.com  May 22  Comment 
WASHINGTON (dpa-AFX) - Tobacco companies Reynolds American, Inc. (RAI) and Lorillard, Inc. (LO) are set to receive antitrust clearance for their proposed merger as early as next week following a lengthy ten-month regulatory review, according to a...
Reuters  May 21  Comment 
Camel cigarette brand owner Reynolds American Inc's planned acquisition of smaller rival Lorillard Inc is expected to receive U.S. antitrust clearance as soon as next week, the...
Benzinga  May 21  Comment 
- sources © 2015 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Jutia Group  May 14  Comment 
[PR Newswire] - As previously announced, on July 15, 2014, Lorillard and Reynolds American Inc. ("Reynolds") entered into a definitive agreement in which Lorillard agreed to be acquired by Reynolds in a cash-and-stock transaction. The transaction...
Forbes  May 12  Comment 
Reynolds stands to gain plenty from combining its distribution channels, marketing muscle, and promotional activities with Lorillard. In particular, the two powerhouses could plug into each other’s shortcomings to prove to be stronger against...
TheStreet.com  Apr 27  Comment 
NEW YORK (TheStreet) -- Lorillard shares are up 0.4% to $71.09 in early market trading on Monday following reports that the Federal Trade Commission will approve Reynolds American's $37 billion bid for the company, according to the New York...




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Lorillard is the 3rd largest tobacco company in the US. Its menthol brand, Newport, gives LO 94% of its revenue, 92% of its volumes, 34% share of all menthol cigarette sales in the US, as well as an overall domestic tobacco market share of 10%. The Greensboro–based company, which also produces the Kent and True brands, is managed by CEO Martin Orlowsky. Orlowsky has been at LO for 20 years. On June 10, 2008, LO was spun off from former parent Loews Group. Previously, Loews floated Lorillard as a tracking stock wherein Lorillard generated cash for the parent’s sake.

Trends and Forces

Economically independent industry

Lorillard participates in an economically independent industry and returns over the long term are not predicated on the overall economic conditions of the US. The cigarette industry is protected by regulatory moats, as well as scale economies and brand loyalty. Brand power is an empty CEO speak if it does not translate into pricing power, and historically, tobacco manufacturers have been able to raise prices faster than volumes have fallen. A pack of cigarettes costs 25 cents to make the fact that it can be sold for 20x that amount is a testament to the robust business fundamentals underlying the industry. 5.5 trillion cigarettes were consumed last year, of which 27-28% belonged to the menthol category. LO, which boosted its market share for the seventeenth straight year in 2007, is the de facto play on menthol, which has enjoyed less detrimental volume trends than the rest of the tobacco group: Newport leads the category in terms of customer retention and margins. According to Merrill Lynch, 1000 sticks of Newport is generating a profit of more than $36 dollars vs. $28 per 1000 sticks at Altria/PMUSA.

Competition

Number 2 player REYNOLDS AMERICAN (RAI) (28% domestic share w/ its menthol brands – most notably Kool and Salem -- accounting for 24% of menthol category) has felt the pangs of lower demand/higher prices more than its rivals. While there is room for margin expansion (25% right now at RAI vs. 30% at LO and MO) at RAI, its drastic volume declines at twice the industry clip are keeping us on the sidelines at the moment. Even after its 2004 merger with Brown/Williamson, its overall US share has shrunk. While its top 3 brands are gaining share, it not stopped the bleeding enough to buoy investor sentiment. Non-premium brands at Reynolds have seen little to no ad spend support, making share erosion a self infliction story that’s made investors nervous. And like LO, RAI offers investors little in the way of international exposure; the lack of near term catalysts, other than its investments in smokeless tobacco (10% of sales), which we feel the Street has already discounted, underscores our lukewarm feeling on the stock.

Altria Group (MO), the 800 pound gorilla ($44.2B market cap) hold 50% of the retail market and its Marlboro brand accounts for 40% of all cigarettes sold. Precisely because it is so big, MO will have to find innovative ways to grow, either by category extensions or improved marketing. As a result, profitability in the near term could suffer slightly, which could explain why the bellwether is 17% off its highs. Altria throws off $3B/year in free cash flow, and that leg of the story hasn’t’ been impaired. The firm is now run by CEO Mike Szymanczyk, whose marketing heavy background resonates with the company’s strategic direction in the coming decade. That said, LO is our favorite pick in the group since it has a better volume story than MO and a better margin profile than RAI.

Retail Share for Top thee Menthol Brands: Jan-Apr 2008) Jan Feb March April
Newport 8.3%8.5% 8.6% 8.6%
Marlboro Menthol 5.0%5.3% 5.5% 5.5%
Kool 3.1%3.1% 3.0% 3.0%
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