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CLSA Upgrades Reynolds American to ‘Outperform’

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Price movement

Reynolds American (RAI) has a market cap of $71.8 billion. Its stock rose by 0.53% to close at $49.18 per share on August 8, 2016. The stock’s weekly, monthly, and YTD (year-to-date) price movements were -1.3%, -7.4%, and 8.3%, respectively, on the same day. RAI is trading 3.9% below its 20-day moving average, 4.0% below its 50-day moving average, and 1.3% above its 200-day moving average.

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Related ETF and peers

The Guggenheim S&P Equal Weight Consumer Staples ETF (RHS) invests 2.6% of its holdings in Reynolds American. The ETF tracks an equal-weighted index of large-cap US consumer staples stocks drawn from the S&P 500. The YTD price movement of RHS was 9.6% on August 8.

The market caps of Reynolds American’s competitors are as follows:

  • Philip Morris International (PM): $154.4 billion
  • Altria Group (MO): $131.3 billion
  • Vector Group (VGR): $2.7 billion

Reynolds American’s rating

CLSA has upgraded Reynolds American’s rating to “outperform” from “underperform.”

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Reynolds American’s performance in 2Q16

Reynolds American reported 2Q16 net sales of $3.2 billion, a rise of 33.3% over net sales of $2.4 billion in 2Q15. The sales of the RJR Tobacco, Santa Fe, and American Snuff segments rose by 41.0%, 13.3%, and 6.4%, respectively, between 2Q15 and 2Q16. The company’s cost of products sold as a percentage of net sales and operating income fell by 11.4% and 67.6%, respectively.

Its net income and EPS (earnings per share) fell to $796.0 million and $0.56, respectively, in 2Q16, compared with $1.9 billion and $1.69, respectively, in 2Q15. It reported adjusted EPS of $0.58 in 2Q16, a rise of 13.7% over 2Q15.

Reynolds American’s cash and cash equivalents fell by 25.3% between 4Q15 and 2Q16. Its debt-to-equity ratio fell to 1.4x in 2Q16, compared with 1.9x in 4Q15. The company has projected adjusted EPS in the range of $2.26–$2.34 for 2016. It has also approved a new $2.0 billion share repurchase program, which has to be completed by the end of 2018.

Quarterly dividends

Reynolds American has declared a cash dividend of $0.46 per share on its common stock. The dividend is payable on October 3, 2016, to shareholders of record as of September 12, 2016.

In the next part of this series, we’ll take a look at VF Corporation.

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