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Why Did Reynolds American Rise 14% on October 21?

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Price movement

Reynolds American (RAI) has a market cap of $67.3 billion. It rose 14.0% to close at $53.78 per share on October 21, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 13.8%, 10.3%, and 19.6%, respectively, on the same day. RAI is trading 14.1% above its 20-day moving average, 11.2% above its 50-day moving average, and 9.7% 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 3.8% on October 21.

The market caps of Reynolds’ competitors are as follows:

  • Philip Morris International (PM) – $149.4 billion
  • Altria Group (MO) – $124.5 billion
  • Vector Group (VGR) – $2.6 billion

Latest news on Reynolds American

In a press release on October 21, 2016, Reuters reported, “British American Tobacco has offered to buy U.S. tobacco company Reynolds American Inc in a $47 billion deal bringing together Newport, Kent and Pall Mall cigarettes to create the U.S. market leader. The British group, which has a 42 percent stake in Reynolds, said its offer valued the company’s shares at $56.50, of which $24.13 would be in cash and $32.37 would be in BAT shares, representing a premium of 20 percent over the closing price of Reynolds common stock on Oct. 20.”

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Performance of Reynolds American in fiscal 3Q16

Reynolds American reported 3Q16 net sales of $3.20 billion, a rise of 1.4% over the net sales of $3.16 billion in 3Q15. Sales of the RJR Tobacco, Santa Fe, and American Snuff segments rose 0.80%, 21.6%, and 11.4%, respectively, between 3Q15 and 3Q16. The company’s cost of products sold as a percentage of net sales fell 730 basis points, and its operating margin rose 940 basis points.

Its net income and EPS (earnings per share) rose to $861.0 million and $0.60, respectively, in 3Q16, compared with $657 million and $0.46, respectively, in 3Q15. It reported adjusted EPS of $0.61 in 3Q16, a rise of 10.9% over 3Q15. Reynolds’ cash and cash equivalents fell 26.1% between 4Q15 and 3Q16. Its debt-to-equity ratio fell to 1.4x in 3Q16, compared with 1.9x in 4Q15.

The company has projected adjusted EPS in the range of $2.27 to $2.33 for fiscal 2016. According to Andrew Gilchrist, RAI’s chief financial officer, “Our updated 2016 guidance reflects our current cigarette industry outlook, along with our increased investment in innovation, regulatory compliance and the current state political processes.”

It has repurchased $75 million of its common stock under its share repurchase program. For an ongoing analysis of this sector, please visit Market Realist’s Consumer Discretionary page.

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