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Reynolds' Shares Advance on Decent Earnings: Time to Buy?

Zacks Equity Research

Tobacco giant, Reynolds American Inc. RAI shares have been on the rise ever since the company posted better–than-expected earnings in fourth-quarter 2016. In fact, the company’s shares have hit a 52-week high of $61.96 on Mar 1, 2017. The shares eventually closed at $61.93 almost 1% higher than the previous day.

Further, shares of the company gained 22% in the past six months, outperforming the Zacks categorized Consumer Staples sector which witnessed an increase of 11% during the same period.

Factors Behind the Rally

Reynolds delivered higher-than-expected fourth-quarter 2016 results in Fwherein adjusted earnings of 62 cents per share surpassed the Zacks Consensus Estimate of 60 cents by 3.3%. Further, the bottom line improved 29.2% from the year-ago quarter driven by higher cigarette and moist snuff pricing.

Although sales missed the consensus mark marginally, it improved 4.3% year over year backed by higher sales across all segments.

Further, investors have been optimistic about the stock ever since Reynolds agreed to merge with British American Tobacco for $29.44 cash and a number of American Depositary Shares representing 0.5260 of British American Tobacco’s ordinary share.

The combined entity will truly own a global portfolio including next generation products and strong cigar brands including Kent from British American Tobacco, and Camel, Newport and Pall Mall from Reynolds. Further, the merged company will benefit from Reynolds’ strong position in the alternative tobacco and next-generation product development, and R&D capabilities. Consequently, the combined entity can develop an innovative pipeline of vapor and tobacco-heating products.

Zacks Rank & Key Picks

Reynolds currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the consumer staples sector worth considering include,

Helen of Troy Limited HELE, Pinnacle Foods Inc. PF and Con Agra Foods Inc. CAG. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Helen of Troy has an expected earnings growth rate of 10.8%. Pinnacle Foods has an expected earnings growth rate of 8.3% and Con Agra Foods has an expected earnings growth rate of 8%.

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