With Guidance Cut Grumblings Priced In For Reynolds American Shares, Cowen Sees Possible Outperformance Ahead

Cowen and Company reiterated its Outperform rating on Reynolds American, Inc. (NYSE: RAI), saying that the company's better positioning with ASU30 (adult smokers under 30) consumers would propel structurally faster growth in the future.

Reynolds American shares are down 6.2 percent since their pre-earnings peak, as disappointment on a miss to consensus coupled with a guide-down weighed on the share price. However, shares are poised for an upside with expectations having been appropriately reset.

"We have an Outperform rating on RAI, as we view the benefits of the LO acquisition as providing upside to estimates, driving healthy DD EPS growth. Coupled with increasingly healthy industry fundamentals, we believe further multiple expansion is warranted," analyst Vivien Azer wrote in a note.

Related Link: CLSA Upgrades Reynolds American To Outperform, Cites Attractive Valuation

Reynolds American has clear momentum with its premium-brands. Indeed, Azer said, on a combined basis NAS, Newport and Camel have gained 90 bps in the first half of 2016 to a combined 24.2 percent share. While government data lags these reported results, in 2014, the analyst these brands boasted a combined 41.1 percent preference share with consumers aged 18–25.

"The magnitude of this gap should fuel outsized share growth for the foreseeable future, as share trends for this younger adult cohort tend to drive national share trends over time," Azer highlighted.

Azer, who has a price target of $57 on the stock, said Reynolds American shares are currently trading at about 3 percent discount to Altria Group Inc (NYSE: MO), although they had traded at a 10 percent premium just 10 months ago.

At time of writing, shares of Reynolds American were down 0.59 percent to $50.30.

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