We Remain Long and Strong Lorillard $LO

Takeaway: We are riding out our long position in Lorillard.

The big news last Friday was that all parties that may be involved in a deal to acquire Lorillard (LO)—directly or not—acknowledged through press releases that in fact, the parties are underway in discussions (yet noted that there is “no certainty that any deal will take place”).

 

Lo9 normal

 

This not-so-new-news (rumors have persisted since March of a deal between Reynolds American (RAI) and LO), bolted LO shares on Friday as high as 5%+ intraday to well over $66.

 

Shares are showing continued strength today and are up 1.3% to just shy of $67.

 

Hedgeye Consumer Staples analyst Matt Hedrick writes that “we are riding out our long position in LO, which we initiated as a Best Idea Long on 2/26/14 at $47.74, to a price target of $80.”


Lo normal

 

Hedrick expects to see RAI and LO work closely to get this deal done, and attaches an 85% probability that a deal in fact gets done.  Assuming Thursday’s (7/10) closing price of $63.09, he assumes there’s an additional 26% upside to our target, and around 8% of downside to $58 should a deal not get done.

 


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