Reynolds (RAI) Stock Gains After Winning Regulatory Approval for Lorillard Merger

NEW YORK (TheStreet) -- Reynolds American (RAI) shares are up 1.95% to $76.93 in early market trading on Wednesday after the company won U.S. antitrust regulatory approval for its proposed $27.4 billion bid to purchase rival Lorillard (LO) following the closing bell yesterday.

The merger would combine the country's second and third largest tobacco companies and is contingent on the two cigarette makers divesting four of their brands including Winston, Kool, Salem and Maverick.

The divested brands will be purchased by U.K. based Imperial Tobacco Group (ITYBY).

Reynolds and Lorillard have market shares of 26% and 14% respectively, trailing Malboro brand manufacturer and industry leader Altria Group's (MO) 47% market share.

The five-member FTC board that approved the deal voted 3-2 in favor of the merger. 

Reuters noted a conflict of interest on the panel as the FTC is commissioned with preventing higher prices through industry consolidation in spite of current U.S. public policy that aims to prevent smoking by increasing prices.

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 23.2%. 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 -30.89%.
  • 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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