Lorillard Earnings: Overreaction Creates Opportunity

| About: Lorillard, Inc. (LO)

Earnings is a particularly interesting time when volatility levels in the market are low. While earnings don't always moves stocks significantly, they often can be a wake up call for traders and investors who have become overly complacent.

Few stocks in the consumer staples sector have performed better than Lorillard (NYSE:LO) over the last couple years. While the S&P 500 and its tracking exchange traded fund SPY (NYSEARCA:SPY) are up nearly 30% this year, and some stocks like Apple (NASDAQ:AAPL), are up nearly 40%, Lorillard's now nearly 2 year rally has been very impressive.

Lorillard has also outperformed other tobacco stocks in the sector, including Altria (NYSE:MO), over the last year by a fairly wide margin.

Lorillard is the only U.S. tobacco stocks that has consistently reported market share gains and increased volume shipments nearly every year for the past several years. Altria, by far the company with the greatest amount of marketshare in the U.S.,reported a drop in annual shipments of cigarettes of around 4%. Lorillard recently reported an over 1% gain in annual shipments in their first quarter earnings report.

This is why I thought the Lorillard earnings report and investor reaction were so puzzling. Lorillard recently reported a strong quarter that includes continual market share gains, but a notable EPS miss, and a drop in cigarette shipments. The stock traded down from near its all-time high of around $135 a share to around $125 as well.

When you look at tobacco earnings the most important metric to look at in my opinion is a company's shipment numbers. If a company is consistently increasing their shipments and gaining market share, it is likely that litigation and other often one time costs are worth overlooking.

While Lorillard did report a notable but small drop in shipments for the first quarter, this company has consistently shown market share gains and increased shipment numbers for several years, and the company reported a market share gain in the first quarter of this year as well.

Also, management explained what they feel is likely to be a misleading quarterly drop in shipment numbers by looking at the wholesale trade inventory effect. Essentially, at the beginning of the year their are certain wholesellers who don't want to hold cigarettes because of various state and federal excise taxes.

Still, how do we know Lorillard's management isn't making excuses? The key here to me is that Lorillard showed a market share gain, analysts are continuing to raise both their Q2 estimates and their fiscal year 2012 estimates, and the company's outlook for the second quarter EPS of around 2.25 is much stronger than their first quarter number of 1.74 a share.

To conclude, while earnings often provide valuable information on short-term and long-term trends, sometimes a single report and the reaction in the trading and investing community can be misleading. While certainly anytime a stock trades down over 5% on earnings there are usually negatives in the report, current trends are not always the best predictor of future results.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , Cigarettes, Earnings
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