Moody's Investors Service on Tuesday boosted its outlook on Reynolds American Inc. (RAI) to positive from stable, saying it expects the tobacco company to continue to grow profits despite fundamental weaknesses in the U.S. cigarette market.
The credit ratings firm also affirmed Reynold American's Baa3 rating, preserving its position on the last rung of investment-grade territory. Moody's said the rating could get an upgrade if the company sustains strong credit metrics and successfully manages litigation and regulatory challenges.
"Litigation and regulation remain ongoing risks, but the effects will likely be mitigated and/or delayed by legal challenges from both RAI and the industry and diversification into adjacent categories such as smokeless tobacco," said Janice Hofferber, a senior vice president at the ratings firm.
Reynolds American, the nation's second-largest tobacco company behind Altria Group Inc. (MO), has seen cigarette pall mall volumes decline due to demographic changes and widespread public-smoking bans. Still, the company in recent years has turned its attention to a few core brands, such as Pall Mall and Camel, and is looking to smokeless products like its Grizzly moist snuff for growth.
Second-quarter results from Reynolds American saw earnings slip 11% as the company booked a litigation charge and saw costs rise.
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