We have downgraded our rating on Lorillard, Inc. (LO) from Outperform to Neutral on a weaker than expected first quarter 2012 results.
Lorillard’s first quarter 2012 earnings of $1.74 per share lagged the Zacks Consensus Estimate of $1.99 per share due to top-line and margin decline. However, the first quarter earnings surpassed the prior-year quarter earnings of $1.71 per share.
Quarterly revenues declined 0.6% year over year to $1.526 billion, but exceeded the Zacks Consensus Estimate of $1.126 billion. Lower unit sales volume resulting from fluctuations in the trade inventory pattern during the quarter was partially offset the higher average prices.
The company has been witnessing slow tobacco demand since the last few quarters. Moreover, governments around the world are imposing restrictions on tobacco companies to reduce smoking in the respective countries in turn intensifying decline in cigarette consumption across the world.
The Food and Drug Administration (‘FDA’) in America has passed a ruling that will compel the tobacco companies to use scary labels on the cigarette packets to shun customers away from smoking. FDA estimates to cut the smoking population by 213,000 in 2013.
Tobacco companies are prohibited to market their products through advertising. Advertising of tobacco products through television and radio has been prohibited since 1971. Lorillard’s Newport brand can advertise in a limited number of magazines that meet certain requirements regarding the age and composition of their readership.
In addition, Lorillard lags behind its two major competitors, Philip Morris USA Inc., an arm of Altria Group, Inc. (MO) and R.J. Reynolds Tobacco Company, a wing of Reynolds American Inc. (RAI) as Lorillard does not sell cigarettes directly to its customers and does not ship products directly to retail stores. This gives a chance to its competitors to capture the retail shelf space available for the tobacco brands.
Though Lorillard has a strong retail market share supported by the company’s Newport Menthol, Maverick and Newport Non-Menthol brands; the slowing demand of tobacco due to government restrictions, public awareness and the presence of other alternatives like electronic cigarettes has continued to reduce the cigarette consumption levels. Accordingly we have downgraded our rating from Outperform to Neutral.
