NEW YORK (TheStreet) -- Reynolds American (RAI) shares are down 0.75% to $75.69 in early market trading today despite reports that the Federal Trade Commission is set to approve its $27 billion merger with Lorillard (LO) , according to the New York Post.
If approved, the deal would combine the second and third largest cigarette manufacturers in the country as well as two of the most popular brands with young smokers, Newport and Camel. The companies have previously agreed to sell five of their brands, valued at $7 billion, to British tobacco company Imperial (ITYBY) in the event that the deal receives regulatory approval.
Industry watchers believe that Imperial will have to prove that it can become a strong third tobacco company with the assets gained from the merger of the other two company's. Imperial does not currently have a strong presence in the U.S. but the company believes that its proven success overseas will translate to America, according to the Post.
The two companies are looking to compete with market leader Altria (MO) - Get Altria Group Inc Report, which holds a 40% market share. Altria released its quarterly earnings results last week, earning 63 cents per share during the period and topping analysts' 62 cent per share expectations.
For the current year Altria expects earnings to grow between 7% and 9% over fiscal 2014 to between $2.75 and $2.80 per share.
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, increase in net income, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
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 6.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the 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. 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.
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Tobacco industry. The net income increased by 7.2% when compared to the same quarter one year prior, going from $363.00 million to $389.00 million.
- Net operating cash flow has increased to $1,080.00 million or 18.42% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -29.58%.
- The gross profit margin for REYNOLDS AMERICAN INC is rather high; currently it is at 59.89%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 18.91% trails the industry average.
- You can view the full analysis from the report here: RAI Ratings Report