NEW YORK -- Cowen Co. recently hosted meetings with the management team from Reynolds American Inc., including the soon-to-be COO and president Deborah Crew, vice president of investor relations Morris Moore, and director of investor relations Bob Bannon.
“While only a few months since the acquisition closed, the opportunity for outsized market share gains for each of Newport, Camel and Natural American Spirit look encouraging,” Cowen analyst Vivien Azer wrote in a research note. “Reynolds now sits in the sweet spot of several shifts in consumer dynamics, while also positioned to capitalize on better retail presence, cost savings and leading brands in (moist smokeless) and e-cigs.”
Here’s some of the takeaways Azer had on Reynolds’ major cigarette brands and priorities moving forward:
The Newport Opportunity
“Early benefits of the Lorillard acquisition are already apparent, and in turn Newport’s share trends are already showing signs of acceleration,” Azer said, pointing to the fact that Newport’s share was up 0.5% year over year since July.“Looking ahead to third-quarter 2015, Newport’s share gains are accelerating, which is encouraging.”
Azer added that Reynolds is preparing to transition its retail contracts, adding Newport to its Every Day Low Price (EDLP) program. Adding Newport will give Reynolds access to 48,000 retail outlets where it is not currently present, as well as access to the 50,000 retail outlets where Newport had contracts through Lorillard.
“This expanded retail opportunity remains somewhat restricted through 2016,” Azer said, citing the standstill agreement that was part of the merger, “as Reynolds is entitled to ‘only’ their fair share of retail space, after which the company can negotiate for outsized retail exposure.”
A Focused Approach for Camel
The potential addition of Newport’s retail network also stands to benefit Reynold’s existing brands, especially Camel.
“Prior to the addition of Newport, the Camel brand served multiple roles in Reynold’s portfolio, as it was a key competitor to Marlboro, but also aimed to be a key growth driver in the menthol category,” said Azer. “Reynolds will look to take a more focused strategic approach with the brand, while capitalizing on geographic white space opportunities (primarily in the East), as they leverage the Newport distribution network.”
“Looking ahead, we expect that the combination of Newport and Camel will position Reynolds well to continue consolidating market share with the adult smoker under-30 consumer, which is a key driver of future market share gains,” she said.
Evolving the Next Gen Portfolio
Currently, Reynolds estimates the e-vapor category accounts for approximately 5% of the total U.S. tobacco category, with 20% of the e-vapor market being disposables, 40% rechargeables and 40% vapor tanks and mods (VTMs). As such, the Reynolds team plans to expand its portfolio of next-generation products.
“With category trends evolving notably, away from e-cigs (in particular disposables) and into e-vapor, Reynolds’s multi-pronged approach positions the company well to capitalize on shifting consumer preferences,” Azer said. “Vuse is the No. 1 e-cig , while the company will soon have access to British American Tobacco’s e-vapor portfolio through their e-vapor collaboration agreement.”
“Reynolds remains our top pick,” said Azer. “Revenue synergies, cost savings and broadly advantaged market positioning position Reynolds well across a number of emerging consumer trends.”
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