Lorillard: Investors Should Wait For Pullback

| About: Lorillard, Inc. (LO)

Lorillard (NYSE:LO) is among the leading tobacco companies of the U.S. The company has delivered a healthy financial performance and owns a dominant market share in the U.S. The company is also the leading U.S. e-cigarette company and owns a diverse product portfolio. Moreover, the company remains an attractive investment option for income-seeking investors; LO offers a solid dividend yield of 4.4%.

Furthermore, analysts have projected a robust growth rate of 12% per annum for the next five years. I believe the stock remains a good long term investment option for investors. However, based on my price target of $51.5 (calculations shown below), I see limited potential appreciation. Therefore, I recommend investors to wait for a pullback before initiating a "buy" position in the stock.

Financial Performance

Recently, LO reported a solid financial performance for 3Q2013; LO reported net sales of $1.827 billion, up 10% as compared to the corresponding period last year, beating analyst estimates of $1.3 billion. LO also reported impressive bottom line results for the quarter. It reported an adjusted EPS of $0.83, up 15% year-on-year, beating consensus estimates by 3%. LO's financial performance for the quarter was positively affected by the increasing market share of its leading brands, new product initiatives, share repurchases, and the solid performance of its e-cigarette brand.

Sales volume decline remains a concern for the tobacco industry due to tougher regulations and health problems. However, LO was able to post a solid sales volume for the quarter and continued to outperform the tobacco industry's sales volume. LO's adjusted sales volume for the quarter was flat year-on-year, better than consensus estimates. Also, LO's sales volume for the quarter was also better than Philip Morris (NYSE:PM) and Altria (NYSE:MO), who's adjusted sales volume for the quarter declined by 5.7% and 3.5%, respectively.

LO owns a strong and a diverse brand portfolio. Also, the company has recently been consistently increasing the domestic market share of all of its brands. The company's domestic market share increased to 14.9% in the recent third quarter, up 0.50bps year-on-year. Also, the company's flagship brand, Newport's, market share increased to 12.6% in 3Q2013, as compared to 12.1% in 3Q2012. The positive domestic market share trend for LO portents well for the company's future financial performance and stock price. The following table shows the increasing market share for LO.






LO's Menthol Market Share



LO's Total Market Share



Source: Company Report

Stock Price Catalysts

LO is the leading U.S. e-cigarette company and has been continuously making efforts to strengthen its e-cigarette brand portfolio and market share. LO currently owns approximately a 50% market share in the e-cigarette category. The e-cigarette market provides robust growth opportunity to LO, as analysts anticipate that e-cigarettes may overtake sales of traditional cigarettes in the next decade. The company has been pushing hard to expand the distribution of e-cigarettes across stores in the U.S. and Canada. In the recent third quarter, LO was able to reach 127,000 stores in the U.S. LO's e-cigarette sales for the quarter increased by 10.5% to $63 million. LO has also been targeting to enter international e-cigarette markets and tap available growth opportunities. On October 1, the company signed an agreement to acquire SKYCIG, a leading e-cigarette company in the U.K. As the company continues to make efforts to strengthen its e-cigarette brand, this will have a positive impact on the company's future earnings.

Also, the company has been introducing new products to keep up with changing consumer tastes and preferences. The company recently started shipping Newport Gold, which will strengthen LO's leading Newport brand and have positive impact on sales volume in the future. The introduction of Newport Gold is projected to have a positive impact of 2% and 3% in 4Q2013 and 2014, respectively, on overall Newport sales volume.

Another important stock price catalyst for LO remains rich shareholder return. The company has a shareholder-friendly management, which has been continuously sharing its success with shareholders. The company currently offers a solid dividend yield of 4.4%, backed by its free cash flow yield of 7%. The company also has an aggressive share repurchase program. The company repurchased approximately $250 million worth of common share in the recent third quarter, under its ongoing share repurchase program of $1 billion. I believe the company could increase its share repurchase program in the near future, which will boost EPS and magnify ROE in the future.


LO has a diverse product portfolio and owns a notable market share, which portents well for the company's future financial performance. Also, the company has been ramping up its activities to expand its e-cigarette market, which I believe will fuel the company's long term earnings growth. Also, the company offers a solid dividend yield of 4.4%, which makes it a good investment option for income-seeking investors.

However, I believe, at current valuations the stock is fairly valued and see limited price appreciation potential. I have calculated a price target of $51.5 for LO, using its three year historical P/E of 14.3x and 2014 EPS forecast of $3.57. Based on the price target, I see limited upside potential, therefore, I recommend investors to wait for a better entry point before initiating a buy position.

LO's 3-Year Historical P/E


2014 EPS est.


Price Target


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.