For months now, Lorillard (NYSE:LO) investors have prepared themselves for the company's seemingly imminent merger with Reynolds American (NYSE:RAI). Yet, even with shareholders having approved the merger, Lorillard is still an independent operating company, and investors in both companies want to see that the maker of Newport cigarettes is still producing solid results.
Coming into Wednesday morning's fourth-quarter financial report, Lorillard investors had hoped to see solid growth in sales and earnings, and the tobacco giant delivered on those hopes. Let's take a closer look at Lorillard's fourth quarter and its plans for what could be its final year as a stand-alone entity.
Lorillard turns cost-savings into cash
Lorillard's fourth-quarter results once again showed how tobacco companies have tried to make the most of their sales opportunities. Net sales climbed at just a 1.4% rate, but net income grew at a much more impressive 16.4% pace. Even after adjusting for certain items, Lorillard posted adjusted earnings per share of $0.93, matching the consensus among those following the stock, and easily topping last year's $0.82 per share in adjusted earnings.
The quarter marked a strong end to a less spectacular year. For 2014, both revenue and GAAP net income rose just 0.6%. A reduction in share count helped boost adjusted earnings per share by nearly 8%, but nearly half of the rise from 2013 levels came from Lorillard's fourth-quarter results.
Looking at Lorillard's segments shows how the cigarette business more than carried its weight during the quarter. Revenue gains of 2.4% for the cigarette division reflected stronger pricing power, which was enough to overcome a 0.9% drop in sales volumes. But a significant portion of the unit's 16% jump in operating income came from impressive reductions in overhead costs, which posted double-digit percentage declines from the year-ago quarter.
By contrast, results for Lorillard's electronic-cigarette division were weaker. Sales plunged by more than a quarter, and the unit's operating losses ballooned to $20 million for the period on an adjusted basis. As Reynolds American and Altria (NYSE:MO) have aggressively promoted their own e-cigarette products, Lorillard has seen pressure on its blu eCigs line, even as it introduced its new PLUS+ rechargeable kit to retailers during the quarter.
CEO Murray Kessler celebrated the results, attributing the strong performance during 2014 to "continued robust cigarette pricing realization, the 12th consecutive year of market share gains, and tight cost controls." In particular, Kessler was pleased that "the fundamentals of our Cigarettes segment continue to lead the industry," calling out the key Newport brand as pivotal in Lorillard's continued success.
Will Lorillard bid farewell?
Lorillard's results were especially noteworthy, given the efforts to which company leaders have had to go to move the Reynolds American merger forward. Now that shareholders of both companies have approved the merger, Lorillard expects the transaction to close during the first half of this year. Among those Lorillard shareholders who completed proxies, 98% voted to approve the merger.
In many ways, Lorillard is now counting on the merger taking place. One of the criticisms of the merger terms was that it forced Lorillard to divest its e-cigarette unit in favor of retaining Reynolds American's Vuse, which was slower to launch than blu had been. With blu results now suffering, though, the move looks a lot smarter in hindsight, and Lorillard would find itself in a much tougher competitive fight if something happens to prevent the merger from going through. Even with a new distribution agreement in the U.K. for its electronic cigarettes, Lorillard still looks poised to move forward without blu.
For the most part, Lorillard's latest results, while solid, show that the company is on autopilot pending the eventual resolution of the Reynolds American merger. Lorillard shares still trade at a discount to merger value, indicating some risk that the deal won't go through; but Lorillard investors should nevertheless focus most of their attention on how Reynolds American will utilize Lorillard's assets once the acquisition is complete.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.