Reynolds' Smokin' Results

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It's amazing the things you remember from your childhood. I must have been all of 5 years old when I strolled into the bathroom and was fixated on a cigarette burning in the large, glass ashtray.

I had seen my parents walking around the house puffing away at these white smoke sticks, but I wasn't sure what was going on. As I inched closer to the bathroom counter and reached out with my right hand to do some investigating, my mother quickly swooped in behind me, slapped my hand, and said, "Don't ever go near that again!"

Thirty-six years later, I can honestly say that I listened to my mother and have never smoked a cigarette in my life. The same can't be said for the rest of the free world, though.

One company that is affected by smoking trends is Reynolds American (NYSE: RAI), which was created from the recently completed transaction of two of the top three cigarette manufacturers, RJR Tobacco Holdings and Brown & Williamson Tobacco. Currently, the No. 1 cigarette manufacturer is Altria Group's (NYSE: MO) Philip Morris USA. The new company, Reynolds American, is expected to have annual sales of $8.4 billion, have a volume of about 172 billion units, and employ approximately 8,100 people.

With the deal being finalized, Reynolds announced the second-quarter earnings for RJR Reynolds Tobacco Holdings. Although net sales were down 5.5% and net shipments dropped 5.9%, the company was able to more than double its profit. RJR's earnings per share were smokin' at $1.77 per share, which easily beat last year's $0.83 and the analysts' expectation of $1.05 to $1.33 per share. Of course, the company's previous plans to eliminate 40% of its workforce and focus mainly on its Camel and Salem brands had a lot to do with the improvement.

The company's management said that it is "well on its way" to reaching its goal of $1 billion in cost savings by the end of next year. Reynolds also expects to reap the rewards of $500 million to $600 million in cost benefits from merger-related operating synergies over the next couple of years. The new leaner, more focused Reynolds is a much more attractive investment candidate than the previous companies. The company has yet to provide guidance for 2004 (expected next month), but the near-term cost savings should go a long way to ensuring solid earnings over the nest few years.

Share your thoughts about the new company at the Reynolds discussion board.

Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.