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Citigroup Downgrades Reynolds American to ‘Neutral’

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Price movement

Reynolds American (RAI) has a market cap of $82.4 billion. It rose 0.55% to close at $58.00 per share on January 18, 2017. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 3.9%, 4.2%, and 3.5%, respectively, on the same day.

RAI is trading 3.7% above its 20-day moving average, 5.7% above its 50-day moving average, and 14.4% 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 YTD price movement of RHS was 1.3% on January 18.

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

  • Philip Morris International (PM) — $145.2 billion
  • Altria Group (MO) — $134.7 billion
  • Vector Group (VGR) — $3.0 billion

RAI’s rating

On January 18, 2017, Citigroup downgraded Reynolds American’s rating to “neutral” from “buy” and also set the stock’s price target at $60.00 per share.

Moody’s reported, “Moody’s Investors Service, (“Moody’s”) affirmed the Baa3 ratings of Reynolds American Inc. (“Reynolds”) and changed the outlook to positive from developing. This follows the announcement that British American Tobacco (“BAT”) had made an offer to acquire the outstanding 57.8% of Reynolds shares that it does not already own for roughly $25 billion in cash and $25 billion in BAT shares.

“This represents a total enterprise value of approximately $97 billion, including $13 billion in net debt assumed. The transaction will give BAT full ownership of Reynolds.”

Performance in fiscal 3Q16

Reynolds American (RAI) reported 3Q16 net sales of $3.20 billion, a rise of 1.4% compared to 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, while its operating margin rose 940 basis points.

RAI’s net income and EPS (earnings per share) rose to $861 million and $0.60, respectively, in 3Q16, compared with $657 million and $0.46, respectively, in 3Q15. The company reported adjusted EPS of $0.61 in 3Q16, a rise of 10.9% over 3Q15.

Reynolds American’s cash and cash equivalents fell 26.1% between 4Q15 and 3Q16.

Next, we’ll discuss Mead Johnson Nutrition Company (MJN).

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