CLSA Upgrades Reynolds American To Outperform, Cites Attractive Valuation

Reynolds American, Inc. (NYSE: RAI) has a robust portfolio and several levers to drive earnings growth, CLSA’s Michael Lavery said in a report. He upgraded the rating on the company to Outperform, citing attractive valuation. The price target has been raised from $52 to $54.

Attractive Valuation

Reynolds American’s valuation versus that of Altria Group Inc (NYSE: MO) is near historical lows, analyst Michael Lavery pointed out. Reynolds American’s shares are currently trading at a 5 percent discount to Altria’s shares, as compared to the historical average of a 3 percent premium.

Lavery believes this discount is excessive, particularly given Reynolds American’s comparable to marginally better market share momentum, the Lorillard deal and solid price mix.

Retail Momentum

Reynolds American’s retail momentum is currently better than expected. The analyst wrote, “Premium-priced Newport and super-premium Natural American Spirit (NAS) continue to perform well, driving RAI’s share and price/mix gains.” Moreover, the company’s volumes are “roughly flat,” which is better than expected.

Expected Takeout

British American Tobacco PLC (NYSE: BTI), which owns a 42 percent stake in Reynolds American, could be interested in a complete ownership, Lavery mentioned. He added that a deal is most likely when Reynolds American’s stock is cheap.

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