Lorillard’s (LO) flagship brands include Newport, Kent, True, Maverick, Old Gold, Blu electronic cigarettes (e- cigs), and the recently -acquired British e-cig brand SKYCIG. Lorillard's flagship cigarette Newport is by far the most popular brand of mentholated cigarettes. Lorillard produces cigarettes for both the premium and discount segments of the domestic cigarette market. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year and expanding profit margins.
Lorillard, is seeing much higher top line growth than its peers. The consistently improving revenue can be attributed to higher volumes (demand) and price increases. Lorillard has increased its market share from 11.0 % in 2008 to 14.4 % in 2012. Newport accounted for 88% of their sales revenue in 2012. Earnings per share increased from $1.72 in 2007 to $3.15 by the end of 2013, for a total increase of 83%.
Earlier in 2013, the management of Lorillard announced a $1 billion share repurchase program. During the recent quarter, the company repurchased 5.7 million shares, which cost $249 million. In the future, the company will further repurchase shares worth $542 million under this program. The company posted an admirable third quarter result with an earnings per share of $0.83. The company also reported a 10% year-over-year increase in net sales, which stood at $1.8 billion.
The company has a P/E ratio of 15.72.The average volume for Lorillard has been 2,975,600 shares per day over the past 30 days. Lorillard has a market cap of $18.4 billion and is part of the tobacco industry.
Electronic cigarettes, or e-cigarettes, represent a huge market opportunity for the tobacco companies. E-cigarettes are battery-operated devices that deliver nicotine to users in aerosol form. The innovative devices do not contain most of the harmful chemicals found in traditional cigarettes and do not produce smoke.
The company undertook strong brand-building initiatives for its Blu eCigs, which included advertisement campaigns on national television, the launch of low-priced rechargeable kits, and expanding the retail distribution network to over 127,000 outlets. Blu e-Cigarettess already have 49% share of the electronic cigarette market in the United States, which shows potential for future growth. On the other hand, its competitor Reynolds American's leading e-cigarette, Vuse, captures just 2% of the market.
Better Than Other Players
Philip Morris (MO) poses stiff competition to Lorillard. However, unlike Philip Morris, Lorillard's core business is in the U.S., where the e-cigarette market is growing faster than the other markets. Philip Morris has given a rosy outlook for its e-cigarette segment, but as the e-cigarette market is still in the initial phase in regions outside the U.S., the company will have to wait before its e-cigarettes drive high sales volumes. Lorillard has the lowest price-to-sales ratio of 2.69. Phillip Morris and Reynolds American (RAI) have price-to-sales ratios of 4.37 and 3.30, respectively. Lorillard has a dividend increase coming up in February and this new dividend will push the yield close to 5% for those buying at $49.
On a Concluding Note
Tobacco companies pay generous dividends to shareholders because they rarely have investment opportunities to grow in the industry. As long as the Lorillard's top line continues to grow and cash flow remains strong, it will provide impressive shareholder rewards. The company certainly carries regulatory and market risk, but has managed to grow its business over time and is enjoying high margins. Lorillard is well positioned for the long term and should produce strong returns for shareholders.
Lorillard has a reputation as an income investor's staple. It has been inculcating in shareholder-friendly policies, and is expected to provide value for investors. It has a record of healthy operating cash flows. The venture of the company into e-cigarettes will support growth in the near future.
Lorillard tobacco companies are well-positioned in the U.S. tobacco space. They have the leading position in the largest and most profitable tobacco product categories. And in each of these categories, Lorillard competes with premium brands that enjoy strong equity and higher margins than most of their competitors.