How the New Reynolds Will Stack Up Against Altria

After the completion of the transaction, which will include the divestiture of select brands to Imperial Tobacco, Reynolds is expected to have over $11 billion in annual revenue and roughly $5 billion in annual operating profit. When the deal closes, Lorillard shareholders are set to receive $50.50 in cash and 0.2909 shares of Reynolds per Lorillard share. This would value the transaction near $71.22 based on Reynold’s current prices.

Merrill Lynch said in its report:

We believe that this is a transformational deal for Reynolds and will create a stronger #2 player in U.S. tobacco. We look for additional guidance from Reynolds management shortly and hopefully pro formas. Along with an updated cost-savings projection, we would look for additional details on possible revenue synergies and updated plans for the new entity. Reynolds has had some 11 months to officially plan for the combination (and likely years of hypothetical planning), so we would anticipate that management will hit the ground running.

The brokerage firm maintained a Buy rating for Reynolds and has a price objective of $81.

Previously, Merrill Lynch had a Buy rating for Altria Group Inc. (NYSE: MO) with a price target of $62. This came after PMUSA announced a price hike that would average $0.07 a pack in May. In the firm’s last report on Altria in May:

We acknowledge that our target P/E is above its 2-year average but reflects our belief that its p/e should expand given its positive underlying company/industry trends in traditional cigarettes, reduced litigation risk, and strong commitment to shareholders. Downside risks to our PO are continued poor price realization, a deterioration in the litigation environment, unfavorable taxation, deeper secular declines in US cigarettes than anticipated, a higher price elasticity of demand than anticipated, and unfavorable FDA regulation, particularly as it relates to menthol. Upside risks to our PO are better-than expected cost-cutting, strong share gains in smokeless and stronger-than expected net pricing.

S&P Capital IQ has a Buy rating for Altria with a price target of $59. The firm sees a low to mid-single digit annual decline in the cigarette industry volumes over the next few years. This is in line with declines that have been seen since a significant increase in the federal excise tax back in 2009. As for the smokeless segment, S&P Capital IQ forecasts volume growth to be at a low-single digit rate.

Wells Fargo gave its bottom line on the Reynolds Lorillard deal:

We have long believed the Reynolds-Lorillard transaction would get approved by the FTC and that it’s a value creating transaction for Reynolds and Lorillard shareholders. We reiterate our Outperform rating on Reynolds and our Overweight tobacco sector rating given the strong industry fundamentals and even stronger industry pricing potential now that the deal is moving forward.

Shares of Lorillard were up 0.5% at $71.40 on Tuesday afternoon. The stock has a consensus analyst price target of $69.50 and a 52-week trading range of $57.52 to $73.02.

Shares of Reynolds were up 1.5% at $72.12 on a 52-week trading range of $55.22 to $77.68. The stock has a consensus analyst price target of $84.33.

Altria shares were up 0.8% at $48.71 on a 52-week trading range of $40.26 to $56.70. The stock has a consensus analyst price target of $57.33.

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