) is getting some surprisingly positive commentary from analysts this morning after yesterday'd hefty sell-off:
- UBS is raising their target to $100 from $80 noting every stock has its role in a given portfolio. Investors own companies because they are best-in-class, others look for cash return/income stories and another type of investor looks for event driven ideas. Lorillard has all 3 of these traits. UBS believes Monday's 7% (unwarranted) pull back offers many types of investors an opportunity to buy a best in class company that is a legitimate M&A candidate.
How Much Do You Get Paid to Wait for the Take-Out? 15% Per Year
While they have limited visibility on when Lorillard will get taken out, they would be surprised to see the company as a stand alone entity beyond 2 years. Firm sees Reynolds American or Imperial Tobacco as logical buyers. They estimate investors waiting for an eventual take out can expect 15%+ total shareholder return per year to wait (10% EPS growth, 5-6% dividend yield).
What's Driving Lorillard's Fundamentals?
The key pillar to UBS investment thesis on Lorillard is beatable and sustainable EPS growth targets of 5-7% per year, driven in large part by the company's exposure to the Newport brand (91% of total company sales). Below are summary points about the key drivers of Newport's growth:
It's menthol: The primary driver of Newport's growth is the migration of smokers towards menthol products (Newport is the highest share menthol brand). Menthol has been gaining share of total cigarette volumes for several years and we expect that to continue over the next few years.
It's more popular than other menthol: On top of the share gains that the menthol category has been capturing from non-menthol cigarettes, Newport has been gaining share within the menthol segment, despite already being the largest menthol brand.
Plenty of "white-space" for menthol left: While menthol cigarettes compose 28% of all cigarettes smoked in the US, there is a distinct geographic skew to the menthol smoking population. Most menthol consumers are east of the Mississippi. They believe there is an opportunity for menthol brands in the Midwest and the Western US. This is evidenced by the fact that menthol gained share in 43 states during 2008 (based on insights from UBS' industry contacts and other data sources).
