Wells Fargo Securities attended Reynold’s American Inc.’s (RAI) Investor Day in New York City on Nov. 16., which highlighted RAI’s growth strategy in the context of an ever-evolving consumer, societal and regulatory environment.
“We came away from this meeting with even greater conviction that RAI is setting the stage today for accelerated top-line growth and margin expansion over the next few years,” said Bonnie Herzog, managing director for beverage, tobacco and convenience research for Wells Fargo.
Herzog offered the following takeaways:
(1) Newport poised for even faster growth driving incremental share for RAI and accelerating its long-term profitability;
(2) Management sounded very confident and bullish given the company’s new position of strength;
(3) Favorable industry tailwinds, including the renaissance in combustible cigs and robust pricing power, should continue to benefit RAI especially given the industry duopoly;
(4) RAI is in an enviable position given its adult smokers under 30 (ASU30) share is 40%, greater than Marlboro’s share of 36%;
(5) RAI’s use of digital media with its new, patent-pending “Spot You More” device could drive increased traffic to retailers’ stores that participate, target the Millennial consumer, and increase promo efficiency and lower costs;
(6) NAS remains on a powerful growth trajectory and should benefit from RAI’s newly emboldened position. Wells Fargo values the business at $7.6 billion in the U.S.; and
(7) Next generation of VUSE innovation appears promising and should narrow the experience gap with combustible cigs, ultimately driving greater profitability growth for RAI over the next decade.
“We continue to believe RAI’s position is stronger than ever and the addition of Newport will propel its growth, driving double-digit EPS for the next several years. We reiterate our Outperform rating on RAI,” Herzog said.