Lorillard Inc.LO

Morningstar Rating

Stock Research and Analysis

by Philip Gorham, CFA

We think Lorillard possesses a wide economic moat because of the extraordinary strength of Newport, its flagship menthol brand. However, with almost 94% of its revenue generated in the menthol category and the threat of Food and Drug Administration Read more

Bulls Say

Newport is the dominant menthol cigarette brand, claiming a 35% share of the menthol category and an 11% share of the overall cigarette industry.

Newport's share has been steadily growing; 2008 was the 18th consecutive year that the brand increased its share.

Reynolds American announced that it is reducing the promotional support it gives to Kool, its menthol brand, which could ease the competitive environment in which Newport operates in the near term.

Lorillard generates the highest operating margins in the domestic cigarette industry, thanks to the premium pricing of Newport, its flagship brand.

The menthol category is declining at a slower pace than the broader cigarette industry. Its share of the total industry has risen from 26% in 2002 to 29% at the end of the third quarter of 2009. Read more

Bears Say

Lorillard generates nearly 94% of its revenue from Newport, leaving it highly undiversified and vulnerable to any negative regulatory developments in the menthol category.

The menthol category could get more competitive if Altria and Reynolds significantly step up efforts to promote menthol offerings under their Marlboro and Camel brands, respectively.

High unemployment and the threat of further excise taxes increases could result in consumers trading down. This could have negative pricing and volume effects for premium brands such as Newport.

Despite the growing share of the menthol segment, Lorillard cannot escape the trend throughout the cigarette industry of declining volume. We expect annual consumption declines in cigarettes of around 3%-4%.

Having sold the international rights to its brands in 1977, Lorillard cannot use Newport to exploit the growth opportunities in overseas markets. Read more

Strategy

Lorillard is concentrated in the premium menthol domestic cigarette industry, and it aims to grow the market share of its Newport brand through selective marketing support. The firm tries to balance Read more

Management

The separation of Lorillard from Loews occurred in June 2008. Therefore, the company has a limited record as an independent company from which to judge its corporate governance. We think executive compensation is generous, with CEO Martin L. Orlowsky Read more

Profile

With annual sales of around $4 billion, Lorillard is the third-largest cigarette manufacturer in the United States. Its flagship brand, Newport, claims an 11% share of the Read more

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