Forum List » Value Ideas and Strategies
Share and discuss value investing ideas and investing strategies.
New Topic
Goto Thread: PreviousNext
Goto: Forum ListMessage ListNew TopicLog In
Lorillard Continues to Dominate the Tobacco Industry
Posted by: abirk (IP Logged)
Date: February 12, 2014 10:59AM

Tobacco companies have always offered high dividends, and have been associated with strong balance sheets. Lorillard (LO) despite hailing from an unhealthy industry is poised to continue raising its safely maintained dividends. The company will find plenty of tobacco huffers in the developing world, if it can build out its international presence. Below is some insight into the company.

Lorillard’s 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.

Current Scenario

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 its 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.

E-cigarettes Getting More Prominence

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 U.S., which shows potential for future growth. On the other hand, its competitor Reynolds American (RAI)'s leading e-cigarette, Vuse, captures just 2% of the market.

Growth Projections

The firm is a leader in e-cigarettes, electronic nicotine delivery systems that simulate the smoking experience, and gives people a healthy injection of nicotine. Lorillard's flagship cigarette, Newport, is by far the most popular brand of mentholated cigarettes. Earnings for this American tobacco company are projected to be $3.42 per share this year. Revenue is expected to grow by 7.4% this year. Earnings per share are pegged to rise by 12.5% this year.

Lorillard has a reputation as an income investor 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.

Economic Downturns

The tobacco industry is heavily taxed and due to steep cigarette price increases, some consumers have switched from premium brands to value or deep-discount brands. Cost-conscious consumers may stop smoking or downgrade to a value-priced brand during economic slumps, but most consume the same brands at the same or slightly lower level. As a result, Lorillard and other similar companies generally experience less of a decrease in revenues during recessions than the economy as a whole.

To End

It is the best positioned among its peers to benefit from consumers trading up to premium brands as disposable income rises, and an opportunity to bring the proportion of premium volume up to levels similar to what it has in developed markets can be seen. Considering the company's pricing power and exposure to growing emerging markets, Lorillard has bright prospects. Therefore, for investors in search of opportunities with current and future growth potential, it provides a great investment.

Tobacco companies pay generous dividends to shareholders because they rarely have investment opportunities to grow in the industry. As long as 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.

Stocks Discussed: LO, RAI,
Rate this post:

Rating: 4.6/5 (8 votes)

Re Lorillard Continues to Dominate the Tobacco Industry
Posted by: kengolub (IP Logged)
Date: February 13, 2014 06:22AM

You've neglected to highlight the risk that the FDA will regulate menthol as a "flavor."  That could theoretically impair sales of Newport, which now accounts for over 80% of LO's sales.  So far so good, but LO is heavily dependent on menthol cigarettes, which puts it in a higher risk category than other tobacco cos. 

A dominant share in ecigs can help diversify LO, there's a huge growth opportunity but competition is heating up.  LO has a headstart with its brands, and this is definitely a very well run company and shareholder friendly too.

Stocks Discussed: LO, RAI,
Rate this post:

Rating: 0.0/5 (0 votes)

Sorry, only registered users may post in this forum.

Please Login if you have an account or Create a Free Account if you don't
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat