Thursday, February 3, 2011

Lorillard Inc. (NYSE: LO): Q4 Earnings Preview 2010

Lorillard, Inc. (NYSE: LO), the nation's third-biggest cigarette company, is scheduled to release its fourth-quarter earnings before the opening bell on Monday, February 7, 2011. Analysts, on average, expect the company to report earnings of $1.67 per share on revenue of $1.00 billion. In the year ago quarter, the company reported earnings of $1.52 per share on revenue of $932.00 million.

Lorillard, Inc., through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States. The company offers 41 different product offerings under the Newport, Kent, True, Maverick, Old Gold, and Max brand names.

The demand for company's cigarettes has been impacted by decreasing social acceptability of smoking, increased regulation, public awareness of smoking's health risks, and rising costs due to excise taxes and litigation expenses. However, Lorillard has managed to grow its profits despite negative press and increased regulatory actions.

In the preceding third quarter, the Greensboro, North Carolina-based company's net income was $274 million, or $1.81 per share, from $235 million, or $1.44 per share, in the year-ago quarter. Revenue grew to $1.57 billion from $1.42 billion in the same quarter last year. Analysts, on average, expected the company to report earnings of $1.64 per share on revenue of $1.01 billion. Total Lorillard wholesale shipment volume for the third quarter of 2010 of 10.003 billion units increased 5.8% compared to the third quarter of 2009.  Gross profit was $566 million in the third quarter of 2010, or 36.1% of net sales, compared to $488 million, or 34.4% of net sales, in the third quarter of 2009.

The company has benefited from higher unit sales volume, higher average prices and lower sales promotion costs. Newport menthol cigarette brand is Lorillard's golden asset. Newport has a market share of close to 35% in the menthol cigarette category. Newport is one fantastic asset. It is the second most popular cigarette brand in the U.S. behind Marlboro. The brand has been steadily taking market share from competitors like Altria's Marlboro Menthol, and Reynolds' Kool and Camel Menthol/Crush brands. Newport has taken market share for an amazing 19 straight years.

A hot issue at the moment is the banning of menthol and other flavored cigarettes. The argument against them is that they encourage young people and people who do not like the taste of cigarettes to smoke. However, there are concerns that a ban might increase counterfeit trading and result in easier underage access. Counterfeit cigarettes are becoming increasingly troublesome as prices continue to climb from higher taxes imposed by governments needing to replenish waning budgets. Nearly 90% of Lorillard’s revenue is derived from the sale of menthol-flavored cigarettes. 

Lorillard's most intriguing financial quality is its enormous free cash flow generation (over $1 billion in the past 12 months). The firm has largely returned it to shareholders in the form of dividends and share repurchases. Lorillard currently pays a hefty annual dividend of 4.50 for a yield of around 6 percent.
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