Morgan Stanley Discusses Lorillard

Morgan Stanley is out with a research report on cigarette makers, and it has an Equal-Weight rating on Lorillard LO. In a note to clients, Morgan Stanley writes, "Our assessment of Lorillard's underlying strength and its third-quarter outlook are unchanged. In particular, we expect some ongoing share growth for Newport Menthol (due to expanded geographic price support), Newport Red (which launched Nov 2010), and Maverick (a value brand). However, we believe that recent syndicated data likely overstates Newport's share progress. Our thinking: (i) A disproportionate percentage (5%+) of Newport volume was sold through NY Indian Reservations. (ii) A recent NY law makes it difficult for Reservations to source volume. (iii) This dynamic is driving a migration of value-based consumer demand from Reservations to conventional retail channels (largely in regional lower-taxed states). (iv) Reservation sales are not captured in the syndicated retail data, which is in contrast to volume sold in the conventional retail channel. Hence, although this shift is largely neutral to Newport's unit volume and financial results, we believe the migration is likely flattering Newport's syndicated retail share performance." Shares of LO lost 94 cents yesterday to close at $117.53.