Stock Report: Lorillard, Inc. (LO)

Stock Report: Lorillard, Inc. (LO) - HE LO table 3 7 14

THE HEDGEYE EDGE

With perceived regulatory risk a main concern in owning LO for some investors, we retained a prominent Washington, D.C. law firm specialized in tobacco to help assess the FDA’s position on menthol. The firm’s opinion certainly helped inform ours -- we suggest there is likely no risk that the FDA bans menthol over the next 1-2 years, and we assign less than a 20% probability over the longer term. 

 

Menthol composes 85% of LO’s profits, so regulatory insight is extremely material to this stock’s story.  

 

We view limited regulatory risk as icing on the cake for a company that consistently delivers double digit EPS growth, pays a healthy dividend ratio of 70-75% of earnings, has an advantaged portfolio mix with positive consumer and demographic trends to menthol cigarettes versus traditional tobacco, and has great upside growth potential in its category leading electronic cigarette, blu.

 

TIMESPAN

INTERMEDIATE TERM (TREND) (the next 3 months or more)

We saw LO rip higher this week on two pieces of news: on rumors Reynolds American (RAI) is considering acquiring LO and on NJOY (a private e-cig maker) receiving a capital injection of $70MM and an enterprise valuation of $1B.  While a RAI takeout may be unlikely due to antitrust issues, the rumor, along with the signal of confidence in the investment made in e-cig industry, is additive to our bullish fundamental outlook on the company.

 

We’re bullish across LO’s trends. We expect its concentrated portfolio in menthol to outperform based on lasting consumption and demographic trends that differ from traditional tobacco, including an over-index to minorities.  We expect volumes to continue to outperform the industry and for it to take pricing to drive strong top line results over the coming quarters.  

 

LONG-TERM (TAIL) (the next 3 years or less)

Over the long term we view electronic cigarettes as a disruptive technology to replace the industry’s declining cigarette volumes and growth engine for the company. 

 

LO bought blu e-cigs back in April 2012. The acquisition allowed LO to get ahead of Big Tobacco’s entry into the category (which came just late last year in a test markets) and gain leading share (at 47% in 2013). Additionally, in October 2013 LO purchased UK e-cig maker SKYCIG to become the first U.S. Big Tobacco company with international e-cig reach.

 

We expect blu to maintain its market advantage domestically and to see additional growth first from the UK market, and then throughout the European continent, and beyond. We see blu’s earnings growth contributing to a re-rating of LO’s multiple higher.

  

ONE-YEAR TRAILING CHART

Stock Report: Lorillard, Inc. (LO) - HE LO chrat 3 7 14


Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more