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The 2014 All-America Research Team: Tobacco, No. 1: David Adelman

< The 2014 All-America Research TeamDavid AdelmanMorgan StanleyFirst-Place Appearances: 12

Total Appearances: 18

Analyst Debut: 1997

With this first-place finish, Morgan Stanley’s David Adelman extends his reign at the top of this lineup to a 12th — and perhaps final — year: In mid-September the All-America Research Team Hall of Famer was named director of equity research for the Americas and handed over coverage of these names to Matthew Grainger. Adelman, 47, wins investor admiration for his tracking of Reynolds American and Lorillard. He lowered the U.S.’s second- and third-largest cigarette makers, respectively, from equal weight to underweight in June, in part because the industry has been facing broad headwinds, including unimpressive operating profit growth and declining cigarette volumes. In addition, he believed at the time that the market was pricing in too much optimism on a rumored deal between the two North Carolina–based companies. Even if Reynolds were to purchase Lorillard, as speculated at the time, antitrust risk from the Federal Trade Commission together with the likelihood of necessary divestitures that would reduce the opportunity for synergies as well as increased menthol-related regulatory risk would imperil the prospective new company, Adelman contended. In mid-July, Reynolds did indeed agree to acquire Lorillard, for $68.88 per share, or $27.4 billion. Investors deemed the price too low, however, and pummeled both stocks. Three weeks later, with Reynolds down 11.1 percent since the announcement, to $55.50, and Lorillard off by 10 percent, at $59.89, he changed course and upgraded the shares to equal weight, deeming them oversold and consensus opinion too pessimistic. Although still forecasting a challenging environment with low return on invested capital and significant FTC risk, he expects the merger to win regulatory approval. Given the complexity of the arrangement, managements project that the deal won’t close before the first half 2015. In mid-September, American Reynolds’ stock closed at $57.54 and Lorillard’s was trading at $59.03.


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