Reynolds American Inc.’s (RAI) management has achieved over $1 billion in integration cost savings and operational synergies from productivity initiatives. Although the cost savings and the new brand-portfolio strategy are contributing to earnings, continued volume declines, additional debt from the Conwood acquisition, and the class-action status of the Light cigarette suit warrant caution.

Reynolds American’s stock (including the processor stock, R.J. Reynolds) has traded in a P/E multiple range of 6 to 17 over the last five years. The stock maintains a low P/E primarily due to tobacco-related litigation issues. The stock has been even pressured down to a single digit P/E during times of court case losses. Although, the first quarter was below expectations leading management to reduce EPS guidance for 2008, the second quarter was above expectations. With the stock yielding over 6%, the Hold rating is maintained.

We expect Reynolds American to trade in a P/E multiple