How High Can Lorillard Fly?
Apr 4th 2012 3:31PM
Updated Apr 4th 2012 3:32PM
Shares of Lorillard (NYS: LO) hit a 52-week high today. Let's look at how it got here and whether clear skies are ahead.
How it got here
Sometimes a new high will have you scratching your head, but not in the case of tobacco company Lorillard. Unlike its rivals within the United States, including Altria (NYS: MO) and Reynolds American (NYS: RAI) , which have taken to laying off workers in response to sluggish sales, Lorillard has seen strong cigarette volume growth in both its premium Newport brand and its discount brands. Last year, Lorillard shareholders witnessed the company growing its market share to 14% at the expense of Altria's Marlboro brand.
Lorillard has also been able to pass along the rising costs of producing tobacco products to its customers. Having pricing power is a luxury in the tobacco sector, and it has allowed Lorillard to once again boost its dividend. Make no mistake that Lorillard's 4.7% yield is a major factor in purchasers' minds.
How it stacks up
Let's take a look at how the company's stacks up next to its peers.
Lorillard is clearly leading the pack higher with discount tobacco producer Vector Group (NYS: VGR) badly lagging its peers.
Price/ Cash Flow
|Lorillard||N/M||16.0||13.9||$1.6 billion/$2.6 billion|
|Altria||17.3||17.8||13.2||$3.3 billion/$13.7 billion|
|Reynolds American||3.8||17.1||13.0||$2 billion/$3.7 billion|
|Vector Group||N/M||38.8||19.1||$317 million/$542 million|
Source: Morningstar, Yahoo! Finance, N/M= not meaningful.
If you were curious why Vector Group was underperforming the group, perhaps the above metrics paint things in a clearer light. The tobacco sector is a capital-intensive business that exposes these companies to a lot of debt and the possibility of countless lawsuits. Vector Group's $317 million in cash doesn't seem like nearly enough if it were to lose a few judgments in court. Similarly, Altria's $13.7 billion in debt seems like a considerable burden considering its Marlboro brand is slowly bleeding market share.
Now for the real question: What's next for Lorillard? That question is really going to depend on whether the Centers for Disease Control and Prevention's anti-smoking advertising campaign and the FDA's transparency push make a dent in getting smokers to quit.
Our very own CAPS community gives the company a four-star rating with 352 out of 371 members giving it an outperform rating. I recently warned of the dangers of investing in the tobacco sector within the United States since the laws within the U.S. are making it increasingly tough for these companies to earn a living. Although I would prefer investing in Philip Morris International (NYS: PM) , which deals strictly outside of the United States and has its business spread throughout more than 180 countries, I would within the United States give my nod of approval to Lorillard, and only Lorillard, at the moment. It doesn't show any indications that its growth will be slowing anytime soon.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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