Will Lorillard Crush Altria and Reynolds American?

Lorillard (LO +0.00%) will release its quarterly report on Wednesday, and investors are pleased that the stock trades at its highest levels ever. One big reason the shares have done so well is that Lorillard has maintained substantial revenue growth even as rivals Altria (MO 1.61%) and Reynolds American (RAI +0.00%) struggle to keep their sales above the unchanged mark. Will its latest initiatives keep Lorillard earnings above those of its peers?

Lorillard stands out from Altria and Reynolds American in a couple of important ways. Lorillard is arguably best known for its menthol cigarette lines, with its Newport brand leading the niche. In addition, Lorillard has gotten a head start on offering electronic-cigarette products to consumers, capitalizing on the popularity of e-cigarettes and the potential that they could be less regulated than tobacco products. Let's take an early look at what's been happening with Lorillard over the past quarter and what we're likely to see in its report.

Stats on Lorillard

Source: Yahoo! Finance.

How far can Lorillard earnings climb?
In recent months, analysts have become slightly more optimistic about Lorillard earnings prospects, raising their third-quarter and full-year 2013 estimates by a penny per share. The stock, though, has kept moving higher, with gains of 4% since mid-July.

Lorillard has thus far been able to avoid some of the negative trends that have plagued its competitors lately. In the second quarter, Lorillard reported a 4.2% rise in revenue, as higher selling prices offset weaker unit sales volume. Net income rose more than 10%, and a drop in outstanding share count boosted earnings per share at an even faster pace.

But Lorillard faces a huge potential threat from the Food and Drug Administration's recent regulatory examination of menthol cigarettes. Currently, the FDA is soliciting public comment over potential regulation of menthol products, with fears ranging all the way up to a complete menthol ban. What happens could eliminate Lorillard's competitive edge over Altria and Reynolds American, as Lorillard gets about 90% of its revenue from menthol cigarettes. At Reynolds, by contrast, menthol drives only about 30% of sales, and Altria gets an even less significant amount of revenue from menthol.

That's one reason that Lorillard has been so aggressive in moving toward electronic cigarettes as a potential alternative market. The company's Blu eCigs brand has taken off, accounting for two-thirds of Lorillard's overall gain in sales during the second quarter. Competitors are jumping on board, as Reynolds Vapor should start appearing in retail stores and Altria's MarkTen brand has already become available. Yet with about 40% market share of the electronic cigarette market, Lorillard will be hard to dethrone atop the fast-growing sector.

Even electronic cigarettes aren't free of controversy, though. European regulators originally sought to have them regulated as medical products, and although the final version of their rules omitted those provisions, limits on e-cigarette advertising could still hurt the business there.

In the Lorillard earnings report, watch to see how important electronic cigarettes become in its overall business. Until the menthol question gets resolved, though, it'll be impossible for Lorillard investors to feel entirely comfortable even with strong earnings results.

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