NEW YORK (TheStreet) -- Reynolds American (RAI) shares are down 1.09% to $68.71 in trading on Tuesday following reports that Federal Trade Commission staffers are planning to recommend that the FTC block the proposed merger between Reynolds and Lorillard (LO) .
The reports stem from the fact that the FTC is scheduled to meet with the two companies this week ahead of a final decision by the regulatory agency which could also come as soon as this week, according to the Wall Street Journal.
Reynolds proposed to buy Lorillard for $25 billion last July in a deal that would combine the country's second and third largest tobacco companies behind industry leader Altria, which has a 47% market share. The companies agreed to sell up to $7.1 billion in assets in an effort to make the deal more palatable to regulators.
Analysts at Wells Fargo say that investor fears of a regulatory rejection are overblown and that there is a 90% chance that the deal goes through, according to Bloomberg.
TheStreet Ratings team rates REYNOLDS AMERICAN INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate REYNOLDS AMERICAN INC (RAI) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, expanding profit margins and notable return on equity. 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:
- The revenue growth came in higher than the industry average of 23.1%. Since the same quarter one year prior, revenues slightly increased by 4.7%. 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.
- Compared to its closing price of one year ago, RAI's share price has jumped by 28.76%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp 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 other strengths this company displays justify these higher price levels.
- REYNOLDS AMERICAN INC's earnings per share declined by 48.1% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, REYNOLDS AMERICAN INC reported lower earnings of $2.71 versus $3.14 in the prior year. This year, the market expects an improvement in earnings ($3.79 versus $2.71).
- 47.99% is the gross profit margin for REYNOLDS AMERICAN INC which we consider to be strong. Regardless of RAI's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, RAI's net profit margin of 6.93% is significantly lower than the industry average.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Tobacco industry and the overall market, REYNOLDS AMERICAN INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
- You can view the full analysis from the report here: RAI Ratings Report