Valuation High
Valuation High on RAI
An update has just come out today on Reynolds American, Inc. in which senior tobacco industry analyst Steven Ralston, CFA is restating his Holdrating on the company mostly due to external factors. We excerpted the following details:
\'Reynolds American, Inc. was formed by the merger of R.J. Reynolds (RJR) and the U.S. operations of Brown & Williamson. Management has achieved over $1 billion in integration cost savings and operational synergies from productivity initiatives. Although the cost savings and the new brand portfolio strategy are contributing to earnings, continued volume declines, additional debt from the Conwood acquisition and the class-action status of the Light cigarette suit warrant caution.
\'Reynolds American's stock (including RJR) has traded in a P/E multiple range of 6 to 17 over the last five years. The stock maintains a low P/E primarily due to tobacco-related litigation issues. The stock has been even pressured down to a single digit P/E during times of court case losses.
\'We expect Reynolds American's stock to trade in a P/E multiple range of 11 to 17. Management has recently increased sales growth targets to the mid-single digits range from prior expectations of low-single-digit growth despite expectations that unit volume growth should continue to decline. The stock is currently trading in the high-end of the historical range at a P/E multiple of 16.1 since improved pricing and productivity initiatives are driving earnings growth. Hence, the Hold rating is maintained. The target price of $72 is 17x 12-month trailing earnings of $4.23.
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