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    Reynolds American Reports Earnings Growth

    But shares fall in second quarter.

    Shares of Reynolds American Inc. fell despite a 66- percent increase in second-quarter earnings, which were fueled by higher prices and the merger with Brown & Williamson Tobacco Corp., according to an Associated Press report.

    Shares of Reynolds American, the nation's No. 2 cigarette maker, closed last week at $83.07, down 1.4 percent on the New York Stock Exchange. Analysts cautioned the company might not be able to sustain its momentum since forecasts call for lower volumes.

    "Our key underlying concern for (Reynolds American) continues to be whether the company will be able to generate any operating profit growth beyond 2006, when merger synergy benefits will be exhausted," analyst Judy Hong of Goldman Sachs & Co. wrote in a note to investors.

    Reynolds American reported it earned $251 million in the past quarter, up from $151 million in the year-ago period. Earnings per share fell because there is a greater amount of outstanding stock.

    Sales in the quarter were $2.1 billion, a 56-percent increase from $1.35 billion a year earlier, the company said.

    "Our second-quarter results place us squarely on track to reach our financial objectives for the year," said Susan Ivey, Reynolds American's CEO and president.

    Without one-time merger and restructuring charges, Reynolds would have earned $1.88 per share in the second quarter, according to a note to investors from analyst Bonnie Herzog of Citigroup Smith Barney. That would be 3 cents more than the consensus forecast of analysts surveyed by Thomson Financial, she said.

    In her note, Herzog said the company had a 7.2-percent decline in worldwide cigarette shipments along with a slight decline in market share. She attributed the results to the company's new strategy of emphasizing a handful of brands.

    In the United States, that strategy helped Reynolds swell its volume by 39.4 percent to 28.2 billion units during the past quarter. The company's operating profit rose 57 percent to $417 million from $266 million a year earlier.

    "We were impressed once again with Reynolds American's operating profit during the quarter," Herzog wrote. "The company's strategy of being much more efficient with its promotional activity seems to be paying off."

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