Reynolds American 2Q Profit Up 3.6%; View Raised

Reynolds American Inc.'s (RAI) second-quarter profit unexpectedly rose 3.6% as the tobacco company reported higher margins, which helped offset a decline in volume at its R.J. Reynolds Tobacco division.

Based on the company's first-half results, and more clarity in shipping patterns and the effects of a federal excise tax increase, the company raised its full-year per-share earnings view to a range of $4.40 to $4.60 a share from $4.15 to $4.45.

Last month, the Food and Drug Administration was given power to regulate tobacco products, giving the government authority to monitor smoking products. Reynolds and Lorillard Inc. (LO) claimed the legislation would give larger rival Altria Group Inc. (MO) advantages, but Fitch Ratings expects well-established brands will maintain their market shares and benefit from potentially greater advertising restrictions.

Fitch, though, warned launching new reduced-risk products could be difficult under the new restrictions. Reynolds, for instance, has been developing new smokeless products to boost sales, but its efforts could be snuffed out by the FDA.

The second-largest U.S. tobacco company behind Altria reported earnings of $377 million, or $1.29 a share, up from $364 million, or $1.23 a share, a year earlier. Revenue declined 3.8% to $2.25 billion.

Analysts polled by Thomson Reuters expected per-share earnings of $1.16 on revenue of $2.27 billion.

Gross margin rose to 46.6% from 44.2%.

The R.J. Reynolds Tobacco division's volume dropped 6%, but earnings rose 3.4%, as higher pricing and lower expenses were more than offset by lower cigarette volume and higher pension costs. Market share for growth brands grew 2.6 percentage points to 12.7%, while Camel's market share was flat at 7.5%.

Total R.J. Reynolds U.S. market share was up 0.4%, to 28.7%.

At the Conwood unit, which makes smokeless-tobacco brands Kodiak and Grizzly, earnings decreased 4.1% but volume rose 6.7% while market share for moist snuff shipments improved 2 percentage point to 29.4%.

On Wednesday, rival Altria reported its second-quarter profit grew a larger-than-expected 8.6% on its purchase of smokeless tobacco company UST as cigarette volumes continued to fall.

In premarket trading, Reynolds American's shares recently were up 0.8% to $41.50. The stock is up by about a third from its 52-week low in March.