First announced in July 2014, Reynolds American Inc.’s (NYSE:RAI) proposed $25 billion acquisition of key competitive rival Lorillard, Inc. (NYSE:LO) has been one of the principal news items in Big Tobacco.
Under the proposed deal, Reynolds, which owns popular cigarette brands Camel and Pall Mall, will be able to leverage additional weight in its ongoing battle against Altria Group Inc. (NYSE:MO) — the pivotal opponent in the tobacco landscape and the owner of the ubiquitous Marlboro brand name.
Of course, as with anything involving capitalistic endeavors, the government is obligated to stymie momentum.
A contributing factor delaying the finalization of the deal between Reynolds and Lorillard is the Federal Trade Commission’s evaluation process, which has been primarily concerned with the antitrust implications involved in an arrangement of this magnitude. A proposed sale of Lorillard’s assets to British company Imperial Tobacco Group PLC (OTCMKTS:ITYBY) should assuage this concern, leading some industry experts to predict that an FTC approval is imminent.
But as wonderful as a finalized merger might be, it’s not the sole reason why investors should be bullish on RAI stock.
Since November 2011, when Reynolds released its third-quarter earnings report for that same year, RAI stock has consistently moved higher one month after every release. The only time it failed to do so was after 2013’s Q2 earnings. Aside from that miss, simple math tells us that the current probability for an earnings-induced rally — which is scheduled to be disclosed on April 17 — is 92.9%, with market returns averaging 2.2% post-release date.
Last year in particular saw the market react robustly following each report … and given the positive trajectory given the fundamentally bullish implications of the merger, it’s fair to expect this trend to continue.
Furthermore, for as much as tobacco stocks tend to be considered big, safe dividend plays, RAI actually exhibits a lot of momentum traits, happy to bounce vigorously from every market dip. Such characteristics have given Reynolds stock an average performance of 3.72% over the past 90 days.
Given similar technical occurrences in the past, RAI stock has an exceptionally high probability (87.5%) of moving higher over the next 90 days. Even over a shorter time frame (five weeks), that probability still is a lofty 75%.
Significantly, the risk-reward structure of RAI shares is also quite bullish. Referring back to our 90-day statistical analysis, when Reynolds stock does move up, the average return is 11.6%. On the 12.5% off-chance that shares fail to rise, average losses amount to only 4.7%. So the reward for winning is nearly 2.5 times the risk for losing; in the five-week period, this still is a 2:1 reward-risk ratio.
Bottom Line
Fundamental, technical and statistical indicators are all aligning to push RAI stock to even higher all-time highs. Meanwhile, even at these lofty prices, Reynolds American will pay you 3.6% annually in dividends — great protection if things get rocky.
All we need is a strong report.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
