NEW YORK (TheStreet) -- Reynolds American (RAI - Get Report) shares are down -2.3% to $61.73 in early market trading on Tuesday after the company agreed to buy rival Lorillard (LO) for $27.4 billion.
The cash and stock deal merges two of the top three most popular cigarette companies in America, combining brands such as Camel, Newport and Pall Mall. In an effort to overcome any potential regulatory hurdles the companies will also divest certain brands.
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The U.K.'s Imperial Tobacco Group (ITYBY) will pay $7 billion to acquire the spun off brands, Kool, Winston and Salem, which in turn will triple its own size in the American Market.
As part of the deal Lorillard will also spin off its Blu e-cigarette brand which it bought two years ago for $135 million. E-cigarettes are the fastest growing segment in the industry and it is not clear yet whether the new company will produce another e-cigarette brand in the future.
Lorillard shares are down -6.1% to $63.10 in early market trading today.
TheStreet Ratings team rates REYNOLDS AMERICAN INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate REYNOLDS AMERICAN INC (RAI) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, expanding profit margins and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Despite its growing revenue, the company underperformed as compared with the industry average of 3.1%. Since the same quarter one year prior, revenues slightly increased by 2.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Tobacco industry and the overall market, REYNOLDS AMERICAN INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- REYNOLDS AMERICAN INC's earnings per share declined by 31.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, REYNOLDS AMERICAN INC increased its bottom line by earning $3.14 versus $2.24 in the prior year. This year, the market expects an improvement in earnings ($3.35 versus $3.14).
- The gross profit margin for REYNOLDS AMERICAN INC is rather high; currently it is at 53.13%. Despite the high profit margin, it has decreased significantly from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 18.75% trails the industry average.
- Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
- You can view the full analysis from the report here: RAI Ratings Report