Reynolds American (RAI) has always been known as one of the largest makers of cigarettes in the world.
Once its $27.4 billion merger with Lorillard (LO) is complete, it will have 34% of the $100 billion U.S. cigarette market, with its Newport, Camel and Pall Mall brands leading the way.
Earnings and revenue beat expectations in the second quarter and the company raised its guidance for the year. This may seem hard to fathom given the fact that smoking is down among Americans and it’s increasingly difficult for tobacco companies to advertise — or even sell products at retailers.
However, the compelling growth story for RAI isn’t just its winning brands. It’s about over-the-counter nicotine replacement therapies (NRTs). RAI sells Zonnic NRT gum in about 25,000 retail outlets, predominantly convenience stores and gas stations.
This also helps RAI’s complement its other new growth channel in e-cigarettes, Vuse. Vuse is now in more than a 100,000 retail outlets and has solidified its position as a top-selling electronic cigarette in the convenience-store channel. All those retail outlets become potential outlets for Zonnic gum in coming quarters.
And eCigs are very popular with a new generation of non-smokers. But the reality is still the same; there are only a few ways to get nicotine efficiently and tobacco — in one form or another — is the best way to go.
And for smokers, RAI will be ingesting the highly popular Newport brand to its portfolio. It recently sold off Kool, Salem, Winston and Maverick brands as well as its blu eCigs brand to U.K.-based Imperial Tobacco Group‘s (ITYBY) U.S. subsidiary to ease the way for the Lorillard merger.
RAI also owns the “all-natural” brand Santa Fe Natural Tobacco Company that sells additive-free cigarettes and has grown quite a following.
Back on the smokeless side, RAI owns the American Snuff Company that sells popular brands Grizzly and Kodiak.
Now, you may not like tobacco companies, but regardless of your views on its products, RAI does very well for its shareholders. And given its recent performance, it’s hard not to appreciate the value and growth it brings to the table.
Remember, virtually all litigation against tobacco companies are over, so there aren’t any dangerous massive litigation cases that are going to fall from the sky. And while smoking is down significantly in the U.S., there will always be smokers.
What’s more, there continues to be growing demand for cigarettes in international markets. Large countries such as India, China and Indonesia have large numbers of smokers and opportunities for RAI to take market share from competitors in the space.
And as that international focus on tobacco moves ahead, the U.S. market is all about the new alternatives to cigarettes. And growth in Newport and Camel menthol brands grows, there’s a link to a younger market buying into the space.
For a stock in a “dying” industry the numbers would hardly prove it. Aside from the strong quarterly numbers and raising guidance for the year, RAI stock is up 55% in the last 12 months and 36% year to date, all the while offering a 3% dividend.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
