Why Lorillard (LO) Stock Spiked Today

NEW YORK (TheStreet) -- Lorillard (LO) stock popped in afternoon trading Wednesday after Reuters broke news the tobacco company, Reynolds American (RAI) and British American Tobacco were in talks for the latter to back a potential merger between the former two. British American Tobacco already has a 42% stake in Reynolds American. 

By market close, Lorillard jumped 10.4% to $62.63, while Reynolds American added 4.4% to $59.77. 

Neither company has commented on the report. 

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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 multiple 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, good cash flow from operations and expanding profit margins. 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 3.2%. Since the same quarter one year prior, revenues slightly increased by 2.2%. 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, LO's share price has jumped by 29.27%, 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.
  • LORILLARD INC's earnings per share declined by 13.9% 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, 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 ($3.44 versus $3.14).
  • Net operating cash flow has remained constant at $703.00 million with no significant change when compared to the same quarter last year. Along with maintaining stable cash flow from operations, the firm exceeded the industry average cash flow growth rate of -31.85%.
  • The gross profit margin for LORILLARD INC is rather high; currently it is at 55.62%. 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 23.62% trails the industry average.
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