Reynolds American Inc. RAI is set to report first-quarter 2016 results on Apr 26, before the opening bell. Last quarter, the cigarette company posted a negative surprise of 4.00%.
In the trailing four quarters, the company outperformed the Zacks Consensus Estimate by an average of 3.00%. Let’s see how things are shaping up for this announcement.
Factors to Consider
Product innovations should help Reynolds counter the persistent volume decline. Moreover, the company is increasing its focus on the e-cigarette category which is gaining popularity, especially among youngsters. Its e-cigarette brand, Vuse, has boosted the top line in the past. The brand also introduced Vuse Connect during the fourth quarter 2015 and launched Vuse Fob online in Mar 2016. With its nationwide distribution completed during fiscal 2015, the company expects the brand to contribute more toward top-line growth in the first quarter.
The addition of Newport brand from the Lorillard merger is also likely to boost sales in the first quarter.
Further, in an attempt to boost e-cigarette sales, on Dec 1, 2015, Reynolds' subsidiary R.J. Reynolds Tobacco Company and Nicoventures Holdings Limited, a subsidiary of British American Tobacco Plc., entered into a multi-year vapor technology-sharing and licensing agreement, under which they will share their technology and develop next-generation vapor products. This should boost the vapor category further in the to-be-reported quarter.
However, consumers are, on an average, shifting away from tobacco products amid accelerating cigarette prices, which combined with the worldwide anti-tobacco campaigns have affected volumes in the first quarter.
Earnings Whispers
Our proven model does not conclusively show that Reynolds is likely to beat earnings this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to surpass earnings estimate. However, that is not the case here due to the following factors:
Zacks ESP: Earnings ESP for Reynolds is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 50 cents.
Zacks Rank: Reynolds’ Zacks Rank #1 (Strong Buy) increases the predictive power of ESP. However, when combined with a 0.00% ESP, it makes surprise prediction difficult.
We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some stocks that investors may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter: