Tobacco heavy hitter Reynolds American
Aside from the revised forecast, there are two other key points that should be taken into account by prospective buyers of Reynolds American. One is the judgment rendered by a federal court judge last Tuesday pertaining to "light" cigarette litigation, and the other is the opportunity for growth in its smokeless tobacco lines.
U.S. Circuit Judge Barrington D. Parker issued a stay that will temporarily halt the proceedings in a case that alleges misleading marketing of "light" cigarettes by Big Tobacco. The court granted the motion while it hears arguments about whether a $200 billion tobacco trial can proceed as a class-action lawsuit. In September, the Schwab case had been certified as a class-action suit by the decision of a lower court. Reynolds American had seen its shares hit an intra-day low of $59.30 following the lower court's initial decision. During mid-day trading action last Wednesday, it was trading at $65.32. While the potential penalties that could result from a loss in the Schwab case would be crippling to the company, I think the 10% run-up in price we have seen since the lower court's decision reflects the sentiment on Wall Street that a loss in the case is unlikely.
On the smokeless tobacco front, Reynolds American reported that its recently acquired smokeless tobacco unit, Conwood, produced adjusted operating income of $73 million for the quarter, which represents a 7.4% rise from its prior-year third quarter. The company also reported that its Grizzly brand now commands 20% of the moist-snuff market.
On the downside, Reynolds American reported that it expects a full-year decline in shipping volume of 4%. The company also noted that the timing of marketing expenses will hurt fourth-quarter margins.
While the looming litigation and decreased shipping volume present some unfavorable risks to Fools considering an investment in Reynolds American, I think the potential benefits outweigh the risks. The collective chokehold that the company and fellow competitor Altria
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