Reynolds American (RAI) Stock Downgraded at RBC

Reynolds American (RAI) stock was downgraded to ‘outperform’ from ‘top pick’ at RBC Capital Markets.
By Amanda Gomez ,

NEW YORK (TheStreet) -- Reynolds American (RAI) stock was downgraded to "outperform" from "top pick" at RBC Capital Markets, which increased its price target to $53 from $50.

The tobacco company's shares have nearly doubled since they acquired Lorillard last year for $27.4 billion, leading to an increase in earnings guidance and making the stock slightly overvalued, RBC said in an analyst note.

"We continue to recommend investors buy RAI shares, as we believe there is still room for some EPS upside to current consensus estimates," analysts added.

Pricing trends are expected to remain steady through 2016, which could help falling sales of value brands, such as Pall.

The Newport brand, which was acquired with Lorillard, could also make up for weaker sales from other brands, analysts noted. Newport volumes increased 3% for the latest quarter.

Reynolds American stock is declining 3.17% to $46.38 in mid-morning trading on Tuesday.

Separately, 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 robust revenue growth, solid stock price performance, compelling growth in net income, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company shows weak operating cash flow.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 14.5%. Since the same quarter one year prior, revenues rose by 41.1%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 57.28% over the past year, a rise that has exceeded that of the S&P 500 Index. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Tobacco industry average. The net income increased by 40.7% when compared to the same quarter one year prior, rising from $467.00 million to $657.00 million.
  • The gross profit margin for REYNOLDS AMERICAN INC is rather high; currently it is at 56.50%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, RAI's net profit margin of 20.78% significantly trails the industry average.
  • The debt-to-equity ratio is somewhat low, currently at 0.97, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Despite the fact that RAI's debt-to-equity ratio is low, the quick ratio, which is currently 0.58, displays a potential problem in covering short-term cash needs.
  • You can view the full analysis from the report here: RAI
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