RJ Reynolds: A Fine Company
By,By,
Michael Weiss
January 30, 2001
Overview of RJ Reynolds (RJR)
• Second-largest US
Tobacco company, with a
25% domestic market
share.share.
• Brands include Winston,
Camel, Salem, and Doral.
• Formerly known as RJR
Nabisco, but Nabisco was
sold to Phillip Morris in
June, 1999.
The US Cigarette Industry
• 45.1M adult smokers
• Market trend moving
towards higher-end,
full-priced cigarettes full-priced cigarettes
(75% in 2000)
• Average price doubled
since 1994, but sales
growth remained
steady.
The US Cigarette Industry (cont.)
• Al Gore says 3,000
kids start smoking
every day. That’s
good for business!good for business!
• The nature of the
market indicates a
strong, continuous
demand for the
product.
Cigarette Legal Issues
• With November, 1998
Master Settlement
Agreement (MSA),
tobacco companies are tobacco companies are
now protected in 46
states.
• Price increases to pay
the settlement have not
hurt sales or profits.
Cigarette Legal Issues (cont.)
• RJR investor relations
says the worst of legal
problems is long since
over.over.
• Yet Margaret
Stancampiano of
Merrill Lynch claims
“legal clouds will
continue to follow.”
What Makes RJR Special?
• RJR has an edge in product development, with ECLIPSE cigarette which heats rather than burns tobacco, thus reducing tobacco, thus reducing secondhand smoke and other health effects.
• RJR has a focus unique among tobacco companies on the US cigarette industry.
What Else Makes RJR Special?
• Considered to have the
most advanced
manufacturing plants in
the industry.the industry.
• It’s important to note that
cigarettes are essentially a
commodity, so any
particular differences
between manufacturers are
of marginal importance.
RJR’s Products
• Exclusively cigarettes, principally including
Winston, Camel, Salem, and Doral, but also
lower-priced brands such as Monarch.lower-priced brands such as Monarch.
• A local convenience store worker said
Camels and Winstons are selling just fine.
RJR Management
• Chairman and CEO
Andrew Schindler, 56.
• MBA from Wharton
• Started with RJR in 1974, • Started with RJR in 1974,
has led management
development, and Nabisco
manufacturing, among
other posts.
• CEO since 1994.
Other Management
• CFO since 1991 is Kenneth Lapiejko, 51.
• Exec. VP and General Counsel (they need
it) Charles Blixt, 48.it) Charles Blixt, 48.
• Exec. VP of Sales James Maguire, 48.
• Exec. VP-Marketing Lynn Beasley, 42.
Financial Highlights
• Sales of $8.2B, Net Income of $404M.
• EPS is $3.97, growing at 17% p.a.
• Currently has $1.2B in cash on balance sheet.• Currently has $1.2B in cash on balance sheet.
• PEG for December 2001 is 1.13
RJR as a Stock
• RJR has a book value of $7.1B, versus a market
capitalization of $5.3B.
• P/E ratio of 15, slightly higher than industry
average of around 12.average of around 12.
• Annual dividends paid are $3.10/sh, a dividend
yield of 6%.
• Earnings growth is predicted to be 13%, above
industry average of 10%.
RJR’s Performance
• RJR has done extremely well
over the past year, due partly to
the NASDAQ crash. It is at 51,
up from 17 in May 2000.
Drawbacks to RJR
• Yikes! The stock is at a high.
• Analysts say the cigarette market will begin to shrink in
the coming years; if this is so, RJR exposure puts it in the
worst position.worst position.
• RJR’s position as a high-income, Old Economy stalwart
means that its stock price is greatly subject to the dynamics
of other market sectors.
On the other hand…
• The stock is still below book value, and earnings
are still very strong.
• The worst of legal problems are over, yet RJR’s
price arguably remains cheaply valued due to the price arguably remains cheaply valued due to the
low expectations generally held on tobacco stocks.
• Dependable dividend payouts and predictability
make it a good portfolio stabilizer.
The Verdict
• RJR looks like the best
deal in the tobacco
industry, but that stock
price will make price will make
anybody think twice.