Why Lorillard (LO) Is Up Today

NEW YORK (TheStreet) -- Lorillard (LO) shares were gaining 7.2% to $52.59 Monday following reports that Reynolds American (RAI) is looking into making a bid for the cigarette maker.

Shares of Reynolds American were also gaining, up 3.7% to $52.71.

According to Financial Times, Reynolds could make a bid for its competitor that values the company at $60 a share.

More than 80% of Lorillard's sales come from the Newport brand of menthol cigarettes, which hasn't seen the same sales declines as the rest of the industry. Lorillard also owns the Blue brand of electronic cigarettes.

While reports of the deal caused both stocks to rise, Wells Fargo warns a deal may be unlikely. The firm said Reynolds may wait for more FDA clarity on menthol regulation and e-cigarette regulation before pursuing a deal.

Must read: E-Cigarettes Are Smoking the Competition: Update

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TheStreet Ratings team rates LORILLARD INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate LORILLARD INC (LO) a BUY. This is driven by a number of 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, 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 3.7%. Since the same quarter one year prior, revenues slightly increased by 3.6%. 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.
  • LORILLARD INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. 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, LORILLARD INC increased its bottom line by earning $3.14 versus $2.81 in the prior year. This year, the market expects an improvement in earnings ($3.45 versus $3.14).
  • The gross profit margin for LORILLARD INC is rather high; currently it is at 53.99%. Regardless of LO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 22.52% trails the industry average.
  • LO's share price has surged by 25.05% over the past year, reflecting the market's general trend, despite their weak earnings growth during the last quarter. 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.
  • Net operating cash flow has decreased to $457.00 million or 13.61% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • You can view the full analysis from the report here: LO Ratings Report

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