Will Reynolds American (RAI) Stock Be Helped Today by New Cigarette That Won’t Burn Tobacco?

NEW YORK (TheStreet) -- Shares of Reynolds American  (RAI) are up 1.22% to $65.49 in pre-market trade after it was reported that the company told investors it plans to launch a new cigarette that will heat but not burn tobacco, eliminating combustion, which is the most harmful part of smoking, according to MarketWatch.

The new cigarette, which will be called Revo, is a rebranded version of a product that Reynolds launched two decades ago. That product flopped, but it believes Revo will appeal to smokers who don't like e-cigarettes but would like an alternative to traditional smoking, MarketWatch said.

The cigarette comes with a carbon tip that, when lighted, heats the tobacco rather than burning it, so that the cigarette releases a tobacco-flavored vapor and not traditional cigarette smoke. Philip Morris International, the world's second-biggest tobacco company in sales, developed a similar product it plans to sell outside the U.S, MarketWatch reports.

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, growth in earnings per share, expanding profit margins and increase in net income. 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:

  • RAI's revenue growth has slightly outpaced the industry average of 0.3%. Since the same quarter one year prior, revenues slightly increased by 4.9%. 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. Compared to other companies in the Tobacco industry and the overall market, REYNOLDS AMERICAN INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • REYNOLDS AMERICAN INC's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, REYNOLDS AMERICAN INC increased its bottom line by earning $3.14 versus $2.24 in the prior year. This year, the market expects an improvement in earnings ($3.41 versus $3.14).
  • The gross profit margin for REYNOLDS AMERICAN INC is rather high; currently it is at 54.91%. 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 20.84% trails the industry average.
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Looking ahead, the stock's 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 the other strengths this company displays justify these higher price levels.
  • You can view the full analysis from the report here: RAI Ratings Report
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