Analysts Retain Ratings On Reynolds American, Inc. Despite Jury Fine

Analysts Retain Ratings On Reynolds American, Inc. Despite Jury Fine

Despite Reynolds American, Inc. (NYSE:RAI) has been slammed with a $23.6 billion in punitive damages by a jury in Florida, analysts at Stifel and RBC Capital reiterate their rating on the second largest tobacco manufacturer in the U.S.

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Christopher R. Growe and team at Stifel in their research report dated July 20, 2014 anticipate the Engle progeny cases will persist for years to come.

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Jury’s $23.6 billion fine on Reynolds American

As reported earlier, a jury in Florida has slammed Reynolds American, Inc. (NYSE:RAI) with a $23.6 billion in punitive damages in a law suit alleging that the company unlawfully lied and failed to warn a cigarette smoker who became addicted and died.

According to public interest law professor John Banzhaf, this verdict provides a template for future actions on behalf of other Florida residents who, under an earlier decision known as Engle, need no longer prove that the tobacco company’s conduct was wrongful, so long as they can show their addiction, and that smoking caused their death or other health injuries.

The analysts at Stifel note the industry has been trying the Engle progeny cases for the last several years with a roughly 50% success rate. The analysts note these cases will persist for years to come. The analysts believe the Engle cases represent a modest overhang for the industry in the future as the cases continue to come to trial. They point out that RJR has paid $114 million to-date for damage awards issued in Engle trials and has an outstanding liability of roughly $185 million for cases pending.

Impact on Lorillard acquisition

Last week, the long-rumored deal between Reynolds American, Inc. (NYSE:RAI) and Lorillard Inc. (NYSE:LO) came to fruition. The second largest tobacco manufacturer in the U.S. announced that it was acquiring Lorillard for over $27 billion in a cash and stock deal, bringing together two of the country’s biggest tobacco companies.

The analysts at Stifel note the recent Florida jury’s verdict could cause some near-term concern for the closing of the recently announced acquisition of Lorillard. They note the large verdict would seem to complicate the company’s acquisition in the short-run during the appellate process.

However Nick Modi of RBC Capital Markets in the report dated July 15, 2014 believes that the FTC risk is minimal for this merger and a second review is possible and likely. However the analyst anticipates this merger to go through in its current form by the first half of 2015.

The RBC analyst note Reynolds American, Inc. (NYSE:RAI) indicated they would produce synergies from the Lorillard Inc. (NYSE:LO) deal of $800 million. The analyst believes there is upside to Reynolds’ guidance of $800 million and RBC’s estimate of $900 million over the next 2-3 years.

While the RBC analyst reiterated “outperform” rating on both Reynolds and Lorillard Inc. (NYSE:LO), the Stifel analysts maintained their “hold” rating for Reynolds.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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