Sunday, July 24, 2011

Lorillard Inc. (NYSE: LO): Q2 Earnings Preview 2011

Lorillard, Inc. (NYSE: LO), the nation's third-biggest cigarette company, is scheduled to release its second-quarter earnings before the opening bell on Monday, July 25, 2011. Analysts, on average, expect the company to report earnings of $2.02 per share on revenue of $1.21 billion. In the year ago quarter, the company reported earnings of $1.73 per share on revenue of $1.04 billion.

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.

The weak economy and high unemployment have caused some smokers to trade down to cheaper brands to save money. Lorillard's Maverick and Reynolds American's Pall Mall brands have been among the beneficiaries. Most tobacco companies have raised prices and cut costs to bolster profits as declining demand cuts into cigarette sales.

In the preceding first quarter, the Greensboro, North Carolina-based company's net income was $248 million, or $1.71 per share, compared to $232 million, or $1.50 per share, in the year-ago quuarter. Revenue rose 12.9 percent to $1.54 billion from $1.36 billion.

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. 

The company recently amended its existing $1.0 billion share repurchase program to authorize an additional $400 million in repurchases, authorizing the company to repurchase in the aggregate up to $1.4 billion of its outstanding common stock.

Full Disclosure: None.
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