Earnings Preview: Lorillard Inc.

RICHMOND, Va. — Tobacco maker Lorillard Inc. reports its third-quarter results on Monday. The following is a summary of key developments and analyst opinion related to the period.
OVERVIEW: The oldest continuously operating U.S. tobacco company and maker of Newport menthol cigarettes, based in Greensboro, N.C., said in July that it was selling more cigarettes even after it raised prices and a federal tax increase went into effect April 1.
Cigarette volumes at Lorillard, whose brands also include Kent, True, Maverick, Old Gold and Max, increased 2.1 percent for the second quarter, when the company estimated volumes fell 4.1 percent across the industry.
It is the fourth major tobacco company to report on its earnings this month. Altria Group Inc. — owner of the nation's biggest cigarette maker, Philip Morris USA, which makes Marlboros — said cost-cutting and higher cigar sales helped its third-quarter profit rise 1.7 percent, even though it sold fewer cigarettes. Altria said its overall cigarette volume fell 12 percent for the quarter, and it estimated a 10 percent drop industrywide.
Reynolds American Inc. — the second-biggest cigarette seller in the U.S. and maker of Camel and Pall Mall — recorded 72 percent higher profit than in last year's third quarter, when restructuring costs and the falling value of its trademarks dampened its earnings. It said its estimated 11 percent drop in volume was better than the industry's decline, which it pegged at 12.6 percent.
Lorillard joined Reynolds and several smaller tobacco companies in suing the U. S. Food and Drug Administration over statements it has made under the new authority it won in June to regulate the tobacco industry. A federal judge in Kentucky is considering the case.
BY THE NUMBERS: Analysts surveyed by Thomson Financial on average expect Lorillard to post a profit of $1.52 per share on revenue of $1.32 billion. In the third quarter a year earlier, the company earned $1.38 per share on revenue of $1.12 billion.
ANALYST TAKE: Analysts hope the third quarter sheds light on cigarette volumes for the year as the industry recovers from turbulence surrounding the federal tax increase.
Credit Suisse analyst Thilo Wrede told investors Oct. 13 that despite volume declines he expects Newport to keep gaining market share and he said Lorillard's Maverick brand would post double-digit volume gains.
In a separate note Sept. 21, Wrede said Lorillard is the best U.S. tobacco company.
"Lorillard continues to have the best margins, volume growth outlook and brand equity," Wrede wrote, adding that Maverick is drawing budget-conscious smokers.
WHAT'S AHEAD: The tobacco industry is anticipating more fallout from the FDA's new regulatory authority. Although a ban on flavored cigarettes went into effect last month, the FDA has not clarified how it will treat menthol cigarettes like Lorillard's popular Newport brand. And both Altria and Reynolds American hope to take some of Lorillard's share of the menthol market.
Wall Street will be looking at how further smoking bans, tax increases and regulation could affect cigarette volumes and profitability.
STOCK PERFORMANCE: During the quarter that ended Sept. 30, shares of Lorillard rose about 7.2 percent to $74.30. Over the previous 52 weeks, the stock traded between $52.50 and $79.02.