Wall Street Journal  6 hrs ago  Comment 
Imperial Tobacco Group reported a small decline in nine-month revenue and said it was on course to complete its acquisition of a pack of U.S. cigarette brands from Reynolds American and Lorillard.
TheStreet.com  Aug 18  Comment 
NEW YORK (TheStreet) -- Lorillard Inc. subsidiary Cygnet UK Trading was ordered by a German court to stop selling the popular blu e-cigarettes in that country, citing trademark confusion with lighter and fuel products sold by Pennsylvania-based...
SeekingAlpha  Aug 18  Comment 
By Bob Ciura: It's easy to think tobacco giant Lorillard (NYSE:LO) is far and away the best bet on electronic cigarettes. Electronic cigarettes, or "e-cigs" as they are more commonly known, present an exciting opportunity in an industry that gets...
Jutia Group  Aug 15  Comment 
[PR Newswire] - GREENSBORO, N.C., Aug. 15, 2014 /PRNewswire/ -- Lorillard, Inc. (LO), the third largest tobacco company in the United States, announced today the declaration of a quarterly dividend on its common stock in the amount of $0.615 per...
SeekingAlpha  Aug 12  Comment 
By Alex Pitti: Reynolds American (NYSE:RAI) recently announced, after much speculation, that the company will be acquiring Lorillard (NYSE:LO). This acquisition has caused the stock to move down from $63 to $56 as the news caused those speculating...
SeekingAlpha  Aug 7  Comment 
ByRupert Hargreaves: The announcement of the much anticipated deal between Reynolds American (NYSE: RAI) and Lorillard (NYSE:LO), raised mixed emotions from investors. On one hand, the deal will create a tobacco giant to rival industry leader...
StreetInsider.com  Aug 5  Comment 
UPGRADES Morgan Stanley raies Lorillard (NYSE: LO) from Underweight to Equalweight. BofA/Merrill Lynch lifts Himax Technologies (Nasdaq: HIMX) from Neutral to Buy and adjusts its price target from $7 up to $7.60. Click Here for more...
TheStreet.com  Aug 5  Comment 
NEW YORK (TheStreet) -- Lorillard shares are up 0.6% to $60.87 after having its price target raised to $65 from $57 by analysts at Morgan Stanley who see the merger of the company with rival Reynolds American as being "more likely than...
Benzinga  Aug 5  Comment 
In a note published Tuesday morning, Morgan Stanley analyst David Adelman upgraded both Lorillard (NYSE: LO) and Reynolds American (NYSE: RAI). The upgrades come along with a increase to the price target of Lorillard and Reynolds from $57 and...
SeekingAlpha  Aug 3  Comment 
By Special Situations and Arbs: 2014 is shaping up to be the biggest year for mergers and acquisitions in almost a decade. Low interest rates and cheap debt markets have made the borrow and buy playbook too good to pass up for many companies....


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.


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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