Reynolds American Inc. (RAI, Financial) reported financial results for the last quarter of 2016 and for the whole year on Feb. 9.
For the fourth quarter of 2016, the U.S. tobacco giant generated an adjusted EPS of 62 cents, a 29.2% increase on a year-over-year basis, and beat analysts’ expectations on EPS by 2 cents.
Source: Yahoo Finance
For the full year of 2016, the company reported an adjusted EPS of $2.31. The figure represents a 16.7% increase from full-year 2015 adjusted EPS of $1.98.
Concerning revenue, Reynolds American reported net sales of $3.186 billion for the fourth quarter of 2016, a 4.3% increase on a year-over-year basis, and beat analysts’ expectations on revenue by $26 million.
Source: Yahoo Finance
For the whole year of 2016, the U.S. tobacco company generated net sales of $12.503 billion, a 17.1% increase from the prior year when Reynolds American reported net sales of $10.675 billion.
Despite a drop in the cigarette brand sales volumes during the last quarter of 2016, compared to the corresponding period of 2015, fourth-quarter 2016 net sales and operating income grew thanks to the increase in the price of tobacco and lower costs sustained by Reynolds American.
Full-year 2016 net sales and operating income grew thanks to the increase in the price of tobacco, in the sales volume of Newport (from 18.9 billion units shipped in 2015 to 34.4 billion units shipped in 2016) and lower costs sustained by Reynolds American.
The RJR tobacco segment’s net sales which includes Newport, Camel and Pall Mall brands, increased by 3.4%, from $2.519 billion in fourth-quarter 2015 to $2.605 billion in fourth-quarter 2016, and by 19.5%, from $8.634 billion in 2015 to $10.314 billion in 2016.
The net sales from Reynolds American’s RJR tobacco segment usually accounts for approximately 82.5% of the company’s total net sales generated by the entire business, which also includes Santa Fe with its Natural American Spirit products sold in the U.S., American Snuff with its smokeless tobacco products of which Grizzly and Kodiak are the most popular brands, and other products such as new products used as nicotine substitutes and e-cigarettes. The net sales from the last three company segments also increased on a year-over-year basis, in fourth-quarter 2016 and full-year 2016.
The operating income generated from the RJR tobacco segment, which accounts for approximately more than 85% of the company’s total operating income, increased by 41% from $915 million in fourth-quarter 2015 to $1.29 billion in fourth-quarter 2016 and by 46.5% from $3.359 billion in 2015 to $4.922 billion in 2016.
The stock is selling at 14.24 times its EPS and at 6.93 its sales. Both ratios are computed over a 12 trailing months’ period.
Reynolds American closed the year with $2.051 billion in cash on hand and securities that can be readily converted into cash and with $12.664 billion as total long-term debt. The latter leads to a total debt-equity ratio of 58.3%, considering that the shareholders’ equity is $21.711 as of fourth-quarter 2016.
When it is compared to the industry’s ratio, 1.38%, and sectors’ ratio, 22.14%, it shows that Reynolds American is one of the most indebted tobacco manufacturers in the tobacco industry. However, the interest coverage ratio (ttm) is 6.86, which means that despite the huge amount of debt, Reynolds American can easily pay interest expenses on the outstanding debt.
The recommendation rating is 2.4 and it ranges between 5.0 (Strong Buy) and 1.0 (Sell).
The analysts’ average target price per share is $57.01 versus a current share price of $60.54, which means that average analyst considers the stock being a bit overvalued by the stock market today.
Disclosure: I have no position in Reynolds American.
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