Why Lorillard Inc. Stock Got Smoked Today

Is this meaningful? Or just another movement?

Jeremy Bowman
Jeremy Bowman
Jul 15, 2014 at 5:41PM
Consumer Goods

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Lorillard Inc. (UNKNOWN:LO.DL) were taking a hit today, falling 10% after investors were turned off by the price on the company's acquisition by Reynolds American (NYSE:RAI)

So what: The deal between the nation's No. 2 and No. 3 tobacco companies had been expected for weeks, so shares of Lorillard, the No. 3 producer, had already been bid up. Reynolds American agreed to purchase Lorillard for $68.88 per share but will spin off some key brands, including blu, the leading e-cigarette brand. Kool, Salem, and Winston will also be sold to the Imperial Tobacco Group. Still, investors didn't seem to like the blu divestiture, as shares of Reynolds American also dropped 6.9% on the news.

Now what: While the $68 purchase was slightly higher than Lorillard's closing price last night, most analysts had expected the sale to be for over $70 a share. Reynolds also seems to believe its Vuse brand of e-cig has better technology, and sales of blu have declined sequentially in recent quarters. The blu sale also makes the deal more likely to pass antitrust merger. Finally, the acquisition makes clear the few growth opportunites left in tobacco, which are mainly e-cigs, which is a small market, and menthols, which Lorillard dominates with its Newport brand. For a dividend play, these stocks are solid, but I'd expect growth to only get tougher going forward.