Lorillard, Inc. (LO)

Joel Greenblatt Pick

With the economy going downhill, stress levels etc..of people on the rise, many may resort to this comfort.

Earnings come out for the company tomorrow:
Estimated earnings: 1.53 year ago earnings 1.38
Estimated revenue: 1320 year ago revenue 1125
This company is still growing and its p/e is only 14
The stock is up 32% over the past year which is about right here. I expect more of the same to continue in this country until people are able to lay off the cigs.
A couple of things to worry about: the all time high for this stock is 81.76. most options that you buy right now at around 80 need the stock to get to at least 82 for you to be in the money. If LO comes out with good earnings and good revenue and a good outlook, we could see this stock hit new 52 week highs, but many things have to happen perfectly inorder for that to happen, otherwise the stocks going to trading under 80. Let's see who wins this fight the bulls or the bears. Hopefully they don't have black lungs.

Ford Strong Buy, S&P (4 or 3 stars), Member of S&P 500

The company has a good balance sheet. Though debt to equity is a little high, they have a ton of cash. It pays a nice dividend. Their major asset is Newport. It has a large and growing share of the menthol market. The payout should be safe. This firm has no international exposure, but is a relatively safe dividend play.

mfi pick 2

Ban (or severe cut on nicotine) impending. New law gives FDA power to outlaw menthol. If the FDA does this (a very real possibility) this will destroy or force major overhaul of LO's business. Either way this stock is gonna drop like a rock.

Mmm, Newport pleasure.

The Newport out of a Hat trick will dazzle you every time.

Smoking will always be cool. Especially in Europe where they have a stronghold. And with their dividend, this market will attract many new fans of smoking.

Lorillard is a mid-cap tobacco company that currently ranks 3rd in market share. Their best-selling product is Newport, the number one selling menthol cigarette in the United States. While smaller than some of the other tobacco companies, Lorillard offers high return on equity and a healthy dividend. The downside is that Lorillard does not sell their products internationally, and because they are not as large as Altria, they may not be as successful in dealing with declining cigarette revenue. If that is the case, I think they may be an acquisition target for a larger competitor.

no debt hi div

Tobacco is still addictive - these tobacco companies do very well in other nations more tolerant of smokers.

sin stocks are the way to go

rsi vs moving average technical pick

Can any of you guys figure out why people would want to buy into a company which makes a product more addictive than heroin?

Lorillard is the third largest cigarette producer in the United States. The company was spun off from conglomerate Loews (L) back in June of this year. Lorillard's golden asset is the Newport menthol cigarette brand. Newport has a market share of close to 35% in the menthol cigarette category, which is good enough to earn Lorillard a 10% total market share, behind only Altria (MO) and Reynolds American (RAI) in the U.S. Newport accounts for over 90% of sales, but the company also produces other, non-menthol branded cigarettes under the names Kent, Satin, True, and Max. Old Gold and Maverick brands round out the portfolio on the discount rack.

Lorillard reminds me a lot of a similar company I reviewed earlier this year: UST. UST has a lot of parallels to Lorillard. That company dominated the smokeless tobacco category with premium brand Copenhagen, similar to Newport. UST was in good financial shape and paid a generous dividend, like Lorillard (over 6.8% currently). However, I though UST had too few growth opportunities and that the price was not low enough given that fact. My final opinion of Lorillard falls almost exactly along those lines. Of course, a few months later UST was purchased by Altria at a 35% premium, so take that for what it's worth!

Newport is one fantastic asset. The brand has been steadily taking market share from competitors like Altria's Marlboro Menthol, and Reynold's Kool brand. In fact, Reynolds has recently scaled back it's promotional support behind Kool, presenting even less of a barrier to continued market share gains. Because of this brand strength, Lorillard can charge a premium for it's product, earning higher margins than competitors and protecting those margins through brand loyalty. The company's operating margin is a sky high 32%. The fact that Lorillard has been able to maintain those attractive margins against competitors hungry for a piece of that profit pie is a testament to the durability of competitive advantage here.

Two other things make Lorillard an attractive investment. MagicDiligence, of course, is an adherent to Joel Greenblatt's Magic Formula strategy, but Mr. Greenblatt wrote an earlier book (You Can Be a Stock Market Genius) that espoused the historical outperformance of recent spin-off companies due to several factors, including institutional indifference and unfamiliarity. Well, Lorillard is a very recent spin-off that very well may follow this historical pattern.

Second, the company is exceptionally strong financially. As I mentioned before, operating margins are north of 30%, and free cash flow margin is a juicy 21%. MFI return on capital is off the charts, averaging 264% since 2003. Even more impressively, Lorillard has accomplished that figure with absolutely no goodwill or intangible assets that sometimes make MFI ROC look better than it should be (the strategy subtracts these out of invested capital). The balance sheet shows $1.2 billion dollars of cash and zero debt. The dividend yield is high and the company has already begun buying back shares.

So those are the positives, and they are substantial. You can do much worse as an MFI investor - Lorillard is a fine Magic Formula pick. The thing holding me back from recommending it as a MagicDiligence Top Buy is the growth outlook and the price relative to that. Revenue growth will be difficult for a number of reasons. One is that domestic cigarette shipment volumes have been declining at a mid-single digit rate for most of this decade, and has been accelerating downward as more states enact public smoking bans and "sin taxes". Also, Lorillard cannot do what some competitors have done and focus overseas for growth; a disastrous decision to sell Newport's international rights was made over 30 years ago. Lastly, it's pretty hard to improve a 30% operating margin by cutting costs - Lorillard is already a lean machine, so significantly expanded margins are unlikely.

This leaves market share gains and higher prices as the only avenues of growth, outside of an outright acquisition (which is unlikely in the near-term due to the spin-off). Higher prices will be difficult to enact in a tough economic environment, and market share gains are a slow process. Lorillard's value is in dividends, share buybacks, and multiple expansion. Almost 100% of free cash flow is paid back in dividends. The earnings multiple of 10x is low, but not excessively so given the weak growth picture. A discounted free cash flow valuation, assuming a 3-4% annual growth, gives a fair value slightly above $60. At the current price of $54, it's just not cheap enough to wholeheartedly recommend, especially with so many other screaming bargains out there.

Good numbers plus massive addiction to Newports makes me think this one's a winner.

This tobacco company has NO debt and an excellent line of products. It is the 3rd largest in the US and offers a very safe 6% dividend at less than 50% payout. They have paid dividends since 2002 and do not have a record of increasing the dividends though. They are currently very near their 52 week low and are a good purchase at this time. They traded at $58.70 today and the range is a low of $53.30 and a high of $92.79. They are below all three moving averages but the nice dividend pays you to wait and will compound nicely.