Lorillard/Reynolds Merger Rumor Blowing Smoke Again

As with my March 3 report, Lorillard, Inc. (LO, $59.42) shares are climbing again on rumors that Reynolds American Inc. (RAI, $56.43) is potentially interested in acquiring the company.

The higher Lorillard’s stock climbs, the less likely any buyout will occur.

Wall Street expects Lorillard’s earnings per share (EPS) to grow 10.3%, 9.3%, and 10.4% in 2014 through 2016.  The dividend yield is 4.14%.

The 2014 price-earnings ratio is 17.3, in a steady ten-year range of 7-18,  IF Lorillard were acquired at a price reflecting the top of the PE range at 18, that buyout price would be approximately $61.92, a 4.2% increase over today’s price.

The reason that I have not recommended Lorillard shares at Goodfellow LLC is because the 2013 long-term debt ratio is 238%.  My goal with stock investing is to find ways to make money while also minimizing risk.  As such, I rarely recommend stocks with debt ratios higher than 40%.

The stock is rising on buyout speculation, but it is otherwise very fully valued, even overvalued.  Shareholders would be wise to use tight stop-loss orders, for the stock is likely to retreat if a buyout offer does not materialize.

There is no way that I’d buy this stock on merger speculation.

It’s already run up twice this year on that rumor.  My assessment is that there’s very little remaining upside.

Goodfellow LLC rating:  Hold, Growth & Income, Public.  (04-30-14)

LO Chart

LO data by YCharts


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Send questions and comments to research@GoodfellowLLC.com.

Happy investing!

Crista Huff


Goodfellow LLC

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