Earnings Preview: Reynolds American

RICHMOND, Va. (AP) -- Reynolds American Inc., the second-biggest U.S. cigarette company, should give investors some insight into its premium Camel brand and its lower-priced Pall Mall brand when it releases its first-quarter results before the stock markets open Tuesday.

WHAT TO WATCH FOR: Americans are buying fewer cigarettes as they face rising taxes and greater smoking bans, health concerns and social stigma, prompting most tobacco companies to raise prices and cut costs to bolster profits. The decline in cigarette volumes industrywide also has led to heavy promotional activity by the nation's largest tobacco companies.

Winston-Salem, N.C.-based Reynolds American said an intensely competitive marketplace drove the number of cigarettes sold by its R.J. Reynolds Tobacco Co. subsidiary down about 3 percent during the fourth quarter to 17.1 billion, compared with its estimate of a total industry decline of less than 1 percent. It sold 5.5 percent more of its Pall Mall brand and volumes of Camel fell slightly. The brands account for more than 60 percent of its total cigarette volume.

Camel's market share remained stable at 8.6 percent of the U.S. market, while Pall Mall's market share grew 0.3 percentage points to 8.9 percent.

The company has promoted Pall Mall as a longer-lasting and more affordable cigarette for smokers who are weathering the weak economy and high unemployment. The company has said that half of the people who try the brand continue using it.

The number of Santa Fe Natural Tobacco Co.'s Natural American Spirit cigarettes it sold grew more than 20 percent to about 800 million.

Analysts also pay close attention to the company's smokeless tobacco products — a segment of the tobacco industry that's growing and becoming increasingly competitive as companies fight the decline in cigarette sales. Volume for its Kodiak and Grizzly smokeless tobacco brands rose 7 percent during the fourth quarter compared with a year ago. The brands had a 32.6 percent share of the U.S. retail market, which is tiny compared with cigarettes.

Investors also will be interested to hear about the company's progress on cigarette alternatives as part of its "total tobacco" strategy.

Reynolds American has begun limited distribution of its first electronic cigarette under the Vuse brand. The battery-powered devices heat a liquid nicotine solution, creating vapor that users inhale.

The company also started a test market in the Des Moines, Iowa, area of a nicotine gum under the Zonnic brand aimed at helping people stop smoking. In 2009, Reynolds bought a Swedish company Niconovum AB, which makes nicotine gum, pouches and spray products. The test market that began in the third quarter is the first of its products to be sold in the U.S.

WHY IT MATTERS: Continued strength from Pall Mall could mean smokers are still switching to cheaper brands to save money, and those who tried the brand during the recession are remaining loyal. But if volumes of premium brands like Camel are rebounding, that could signal consumers are adjusting to higher prices on cigarettes following federal and state tax hikes. Progress on cigarette alternatives could illustrate a greater interest in smokers looking to quit or find other products to use in places they cannot smoke.

WHAT'S EXPECTED: Analysts, on average, expect Reynolds American to report earnings of 69 cents per share on revenue of $1.92 billion, according to FactSet.

LAST YEAR'S QUARTER: Reynolds American reported adjusted earnings of 63 cents per share. Its revenue was $1.93 billion, excluding excise taxes.

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Michael Felberbaum can be reached at http://www.twitter.com/MLFelberbaum .