I'm searching for good investments to make in 2013. In this article, we'll take a look at Lorillard (LO). We'll evaluate Lorillard an as equity investment: We'll examine the valuation, financial performance, and share price performance. Also, we'll evaluate the firm from the perspective of a technical analyst. The evidence suggests investors should accumulate shares of Lorillard, but you read and decide.
First, we'll use descriptive statistics by taking a sample of the population of monthly returns of Lorillard. At this point, we won't make any statistical inferences. Some of the sample statistics will include the arithmetic time-series mean monthly return, and the time-series median monthly return. Also, we'll take a look at a histogram. We'll also discuss the absolute frequencies, relative frequencies and cumulative relative frequencies of the return profile. Further, we'll determine the geometric mean return and the modal interval. The sample will consist of monthly returns between June 2008 and now.
The arithmetic time-series mean monthly nominal return was 1.6 percent. The time-series median monthly nominal return was 1.2 percent.
Ten of the nominal monthly returns were between -10 percent and -5 percent. Eleven of the nominal monthly returns were between -5 percent and 0 percent. Eighteen of the nominal monthly returns were between 0 percent and 5 percent. Twelve of the nominal monthly returns were between 5 percent and 10 percent. Four of the nominal monthly returns were between 10 percent and 25 percent.
Twenty percent of the nominal monthly returns were between -5 percent and 0 percent. About 33 percent of the nominal monthly returns were between 0 percent and 5 percent. Twenty-two percent of the nominal monthly returns were between 5 percent and 10 percent. That said, 18 percent of the nominal monthly returns were between -10 percent and -5 percent.
About 38 percent of the nominal monthly returns were between -10 percent and 0 percent. That means the other 62 percent of nominal monthly returns were 0 percent or higher. The modal interval was 0 percent to 5 percent.
The time-series geometric mean nominal monthly return or time-series nominal monthly compound growth rate was 1.4 percent. The nominal geometric mean monthly return on a bond equivalent basis was 16.8 percent. The nominal geometric mean monthly return on an effective annual yield basis was 18.2 percent.
We'll make a statistical inference and say with 95 percent confidence that the population geometric mean nominal monthly return is between -0.3 percent and 3.1 percent.
Next, we'll compare some of those sample statistics with the sample statistics of the S&P 500 during the 2000-2012 period.
The arithmetic time-series mean monthly nominal return on the S&P 500 was 0.1 percent. The time-series median monthly nominal return on the S&P 500 was 1 percent.
The geometric time-series mean nominal monthly return or time-series nominal monthly compound growth rate on the S&P 500 was 0 percent. I'm sure you can calculate the nominal bond equivalent yield and nominal effective annual yield on the S&P 500: they were 0 percent.
Thus, Lorillard outperformed the S&P 500 between 2000 and 2012.
The sample standard deviation of monthly returns on Lorillard was 6.7 percent. The sample standard deviation of monthly returns on the S&P 500 was 5 percent.
Lorillard's nominal monthly return distribution was positively skewed and mesokurtic.
Lorillard's total revenue grew at a nominal compound annual growth rate of 10 percent between 2004 and 2011.
Lorillard's net income grew at a nominal compound annual growth rate of 8 percent between 2004 and 2011.
Lorillard's dividend per share increased at a nominal annual compound rate of 7 percent.
Reynolds' net income grew at an arithmetic average annual growth rate of 12 percent between 2003 and 2011.
Reynolds' dividend per share increased at a nominal annual compound rate of 9 percent between 2006 and 2011.
The two firms are growing at about the same rate; however, Reynolds was increasing its dividend at a faster pace while Lorillard's revenue was increasing at the faster pace.
That said, since at least 2004, Lorrilard has grown faster than the economy. Further, sales and net income have appreciated at a slower pace than the share price.
Tobacco products have a price inelastic demand and income inelastic demand.
The industry's competitive environment is that of an oligopoly: the firm doesn't make an economic profit, but it does make a normal profit. However, firms in the industry tend to use forms of price discrimination.
U.S. fiscal policy is weighing on aggregate demand while U.S. monetary policy is boosting aggregate demand as the U.S. economic output remains below potential.
Lorillard may continue to grow faster than the economy. Professional investors should monitor the firm's financial performance and financial position as Lorillard could continue to outperform the broader market.
The firm was valued at 2.29 times sales and 13.85 times trailing earnings.
Reynolds American was valued at 2.84 times sales and 15.97 times trailing earnings.
Said differently, Lorillard is trading at a discount to its peers.
As of writing, the dividend yield was 5.60 percent. Also, the debt-to-equity ratio was 0.67.
The quick ratio was 0.55 and the current ratio was 0.74. Lorillard had a market cap of roughly $24B.
Shares of Lorillard were trading near the flattening 50-day simple moving average. We'll have to see if the $110 level holds.
Lorillard is trading in a corrective wave of intermediate-term degree.
The MACD is confirming the corrective wave in the share price of Lorillard.
Also, the broader market remains in a Dow theory bull market.
Finally, the Dow Jones industrial average and S&P 500 are trading above the 50-day simple moving average.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.