Reynolds Solid in Third Quarter

This morning, Wells Fargo Securities LLC reported good news for Reynolds American: the Winston-Salem, NC-based company met Wells Fargo's third quarter expectations with adjusted earnings per share (EPS) at 79 cents, up 6.8%. The news was all the more impressive, considering the company's declining cigarette performance during an admittedly tough quarter. "Camel volume was much weaker than we expected (down 8%)," said Wells Fargo New York City-based senior analyst Bonny Herzog. And although Pall Mall volume was technically up 1%, meeting Wells Fargo's predictions for the brand, Herzog noted "'aggressive competitive promotional activity' … negatively affected RAI's shipment volume and share." Ultimately, Reynolds experienced a total decline in cigarette volume of 6.9%--a number significantly below industry volume declines of 2.7%. So how did Reynolds , producer of Camel cigarettes manage a positive third-quarter EPS? "Overall, price increases and productivity savings helped to offset cigarette volume declines, driving adjusted operating income growth of 1.7% and strong margin improvement of 200bps to 36.1%," said Herzog. Additionally, the Wells Fargo report cited impressive smokeless and OTP numbers in the third quarter: Grizzly volume grew 7.8% (outpacing the industry average of 5%) and American Snuff gained 0.9 share retail share points to 32.2%. With Reynolds' nicotine replacement products (Zonnic) and e-cigarettes (Vuse) in test markets, noncigarette products could continue to boost Reynolds' numbers. "As we expected, Camel volume was weak in the quarter due to heightened promotional activity and Grizzly volumes outpaced the industry," Herzog concluded. "On the margin, we expect the stock to modestly outperform. We maintain our market perform rating."