RAI reported Q3 top and bottom line results in-line with consensus, and slightly revised downward its FY EPS guidance to $3.17 to $3.27 (versus last quarter’s estimate of $3.15-$3.30). The stock is trading down over one percent on what we view as a stronger quarter sequentially, with total cigarette volume declines moderating at -4.3% (versus -6% last quarter), solid smokeless results, and increased excitement around the launch of its e-cigarette VUSE (more below). Our quantitative set-up suggests the stock is a buy below $50.
Total retail share slipped 50bps to 26%, offset by higher pricing year-over-year and strong performance from smokeless offerings: it saw a +0.7% share increase to +17.8% from Camel and Pall Mall, the company’s growth brands that account for almost 70% of total share volume. Camel SNUS, which enjoys dominate market share (~80%), grew +0.4 points and increased pricing from its moist-snuff brand Grizzly gained +1.6% share points in the quarter.
We do expect cigarette volume pressure through year-end. The company said volumes should decline closer to -4% (vs previous guidance of -4 to -5%) for the year, but did not predict any less consumption based on the impact from the government shutdown. We’re bullish on the migration to smokeless tobacco and e-cigs to offset declining cigarette volume over the medium term.
On e-cigs: If you don’t think e-cigs matter to big tobacco – think again! On the earnings call, the progress on VUSE, the company’s first e-cig that was launched in July in the test market of Colorado, was the first brand that management reviewed. CEO Delen said that VUSE is getting a great reception with leading market position in the state (we’d expect so given the strong couponing). He noted strong repeat purchasing and that its replacement cartridge was the largest selling SKU, and believes that VUSE can attain cigarette-like margins over the medium term. Further information on its plans around a national roll-out were indicated to come at next month’s Investor Day meeting.
Delen indicated that he has no further information on when the FDA may come out with a ruling on e-cigs (expected October timeline) and/or if the government shutdown will delay the announcement. He did note that RAI engaged with the FDA on VUSE, and the meeting was heavily attended by the FDA.
Given that Colorado is a test market, it’s hard to extrapolate the costs for a nationwide roll-out – certainly it’s a competitive category and RAI is playing slightly behind the 8-ball. We look forward to monitoring VUSE’s performance.
Results: On the quarter, EPS was in line with consensus at $0.86, up 8.9% year-over-year. Revenue also met analysts’ estimates at $2.14B, up 0.9% year-over-year. On the year, RAI revised its EPS guidance to $3.17 to $3.27 versus last quarter’s estimate of $3.15-$3.30.