RAI is on the tape with Q1 results - $0.03 better than consensus and maintaining full-year guidance. We think the key theme across the release is lower volumes but better profitability, a state of nature that we think persists for the balance of 2013.
What we liked:
- EPS of $0.72 versus consensus of $0.69
- Maintained full-year guidance of $3.15 - $3.30
- A substantial increase in cigarette profitability per unit year over year from $33.20 per thousand to $39.42 per thousand despite Q1 2012 being the most difficult comparison on this metric
- Continued share momentum in Grizzly (+110 bps) despite a difficult Q1 comparison
- A 4.6% increase in revenue per can at American Snuff (however, against a ridiculously easy comparison)
- A 252 bps improvement in operating margins at American Snuff (comparisons get significantly more difficult as the year progresses)
What we didn’t like:
- Total cigarette industry declined 6.1% against the easiest comparison of the year (Q1 2012 declined -4.0%)
- RAI’s volume decline outpaced the industry (-8.7%)
- Pall Mall declined against the easiest comparison of the year
- Disappointing American Snuff volumes (+1.1%) as well as smokeless industry total volume (-1.4%)
At this point, we aren’t seeing a lot to do with the domestic tobacco manufacturers – the likely combination of weaker volumes and better profitability preserves guidance and consensus estimates, and the yields in the names are still chunky. Our bias would be to be buyers on material weakness in RAI, LO and MO for trades, using the yields as a backstop.
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HEDGEYE RISK MANAGEMENT, LLC