QUOTE AND NEWS
Motley Fool  Aug 31  Comment 
The Centers for Disease Control and Prevention reports that e-cigarette use by teens is on the rise.
Wall Street Journal  Aug 29  Comment 
Federal regulators have requested more information on Reynolds American's pending deals to buy Lorillard and divest certain brands to Imperial Tobacco Group.
Jutia Group  Aug 29  Comment 
[PR Newswire] - WINSTON-SALEM, N.C. and GREENSBORO, N.C., Aug. 29, 2014 /PRNewswire/ -- Reynolds American Inc. (RAI) and Lorillard, Inc. (LO) today announced that each company has received a request for additional information ("second request")...
Jutia Group  Aug 29  Comment 
[PR Newswire] - WINSTON-SALEM, N.C. and GREENSBORO, N.C., Aug. 29, 2014 /PRNewswire/ -- Reynolds American Inc. (RAI) and Lorillard, Inc. (LO) today announced that each company has received a request for additional information ("second request")...
SeekingAlpha  Aug 27  Comment 
By Anthony Parsons: For income investors, a good thing to do is to constantly seek out companies that pay generous dividends. Equally important along with doing that is to find companies that have the ability not only to maintain their dividends,...
Market Intelligence Center  Aug 21  Comment 
The patented option-trade picking algorithms that power MarketIntelligenceCenter.com's Artificial Intelligence Center are highlighting two trades on Lorillard Inc (LO) today after it closed at $60.57 on Wednesday. For more conservative investors,...
Motley Fool  Aug 19  Comment 
Maybe the decision to shed the top-selling electronic cigarette brand wasn't as odd as it first seemed
Motley Fool  Aug 19  Comment 
Looking at the bear case against a stock is always a smart investment decision.
Wall Street Journal  Aug 19  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...




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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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