Reynolds American, Inc. (RAI): Four Reasons To Buy, But There Is Still One Problem

I know many investors are huge fans of Altria, and given the company’s historical performance that’s understood. However, at this point the shares have the third lowest yield, the lowest expected growth rate, and the second highest P/E ratio. The fact that Altria has a much weaker balance sheet then Reynolds American, and also is retiring shares at a slower pace makes it difficult to recommend. For Motley Fool’s take on Altria, please feel free to take the report below.

For growth investors, Philip Morris must look like an attractive option. There’s no question the company should outgrow its peers over the next several years, but it’s a little worrisome that the company’s overall cigarette volume was down in the current quarter. Given that international growth in cigarette sales was supposed to be the main attraction of this internationally focused company, if this growth doesn’t materialize investors could be disappointed.

This leaves Lorillard as the one option investors might consider over Reynolds American, Inc. (NYSE:RAI). On a point to point comparison, buying Lorillard stock gives investors a yield that is just slightly below Reynolds American, yet the company is expected to increase earnings at a rate almost 2% faster. When you include the fact that Lorillard sells for a P/E ratio that is less than Reynolds American, it seems as though you have a better value.

Though Lorillard has a lower gross margin and did not retire as many shares, the company does have revenue growth of 3.3% in the last quarter relative to a 2.6% decline at Reynolds American. In an industry suffering from volume declines, the importance of revenue growth cannot be overstated. Reynolds American looks like a good investment, but Lorillard looks just a bit better.

The article 4 Reasons To Buy, But There Is Still One Problem originally appeared on Fool.com and is written by Chad Henage.

Chad Henage has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International (NYSE:PM). Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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