Reynolds American (RAI) Stock Climbs on Pending Regulatory Merger Approval With Lorillard

NEW YORK (TheStreet) -- Reynolds American (RAI) shares are up 0.2% to $75.64 in early market trading on Friday as the cigarette manufacturer is expected to receive regulatory approval for its proposed merger with Lorillard (LO) from the Federal Trade Commission as early as next week, according to Wells Fargo analyst Bonnie Herzog.

"It's not a matter of 'if' but 'when' for FTC approval of the RAI-LO deal, which we continue to expect any day," wrote Herzog of the planned $27 billion merger.

Reynolds and Lorillard are the U.S. second and third largest tobacco companies respectively, and FTC regulators have been scrutinizing the deal since it was first announced last July.

Reynolds takeover of fellow North Carolina-based tobacco company Lorillard would be conditional on certain divestitures that both companies have previously said they are willing to make. U.K. based Imperial Tobacco  (ITYBY) has agreed to takeover Lorillard's facilities, the company's 3,000 person strong work force and about $7 billion worth of cigarette brands in the event that the deal is approved.

Lorillard shares are flat in early market trading today.

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 its 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 -31.05%.
  • 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

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