Stock (Symbol) |
Reynolds American (RAI) |
Stock Price |
$47 |
Sector |
| Food & Necessities |
Data is as of |
| December 7, 2015 |
Expected to Report |
| Jan 27 |
Company Description |
 Reynolds American Inc. (RAI) is a holding company. The Company operates through three segments: RJR Tobacco, American Snuff and Santa Fe. The RJR Tobacco segment consists principally of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. The Santa Fe segment consists of the domestic operations of Santa Fe Natural Tobacco Company Inc. (SFNTC). The Company’s wholly ow ned subsidiaries include R. J. Reynolds Tobacco Company, American Snuff Company, LLC (American Snuff Co.), Lorillard, Inc., Santa Fe Natural Tobacco Company, Inc. (SFNTC), R. J. Reynolds Vapor Company (RJR Vapor), Niconovum USA, Inc. and Niconovum AB. Source: Thomson Financial |
Sharek’s Take |
 Reynolds American (RAI) is growing profits in the mid-teens, paying a yield of 3% and is selling for 20x earnings. The stock is also hot, its rose from $32 to $47 in a year. In June RAI merged with Lorillard, makers of Newport. Altria and Reynolds now control 80% of the $100 billion U.S. tobacco market. 2015 got a boost from the merger, and 2016 should also be a solid year. A big key to next year’s growth is the company won’t have to pay the Tobacco Transition Payment Program anymore, which called for tobacco companies to pay a total of $1 billion per year to farmers for ten years. This could boost profits 10% in 2016. Electronic cigarettes are also a growth catalyst, but this qtr I get the sense this isn’t as big a one as I previously thought. Reynolds began selling its Vuse brand last year. I feel this stock is a good choice for conservative growth stock investors as RAI has upside to its 2016 Fair Value of 10% in addition to a 3% yield. |
One Year Chart |
 The teens profit growth is very appreciated these days as the strong dollar has hampered a lot of value stocks. Thee’s not a lot of good value stocks growing profits at 10% anymore, and that’s a hurdle for value mutual funds. Thus, RAI is getting a premium price. It sells for 20x earnings, but that’s not high as the Est. LTG is 14%. Tack on a 3% dividend and this could provide 17% total return each year (hypothetically). |
Fair Value |
 I feel 2016 will be another year in which stocks producing profit growth in the fast of the strong dollar will be appreciated. I think the P/E will rise to 22 and with current profit estimates that would be a $51 stock, which would give investors a 14% total return if the dividend stays intact (they just raised it). Further out, the stock could give total return of 31% by 2017 if it hits my Fair Value. |
Bottom Line |
 Reynolds American has three things going for it: (1) Lorillard merger synergies, (2) a big drop in taxes, and (3) electric cigarettes becoming more mainstream. The company is growing profits in the teens and that is much appreciated in the current stock market as few large corporations are able to accomplish that with the strong dollar. Reynolds American ranks 11th of 24 stocks in the Conservative Growth Portfolio. |
Power Rankings |
Growth Stock Portfolio
N/AAggressive Growth Portfolio N/AConservative Stock Portfolio 11 of 34 |
