UST Inc.: Overlooked Opportunity Due To Market Perceptions

A wise investor never lets a perceived vice get between him and a nice profit. So no matter how you feel personally about booze and chewin' tobacco, read on.

Goldman Sachs just issued a report today upgrading UST Inc. (UST) to a BUY. UST Inc is a holding company not just for U.S. Smokeless Tobacco Company, which makes smokeless tobacco products (that's chaw to you and me) under the Copenhagen and Skoal brand names, but also for the wine brand, Ste. Michelle Wine Estates, that produces wine under the Chateau Ste. Michelle and Columbia Crest (contributing 15% of total sales).

Sold mainly in the U.S., this is an example of a company that some people don't necessarily feel comfortable supporting -- booze and chewing tobacco. But if this doesn't offend your sensibilities, the company presents a strong buy opportunity. As Goldman's report states, the market is overestimating the level of competition -- particularly from Marlboro (MO) --in smokeless tobacco, where UST makes the majority of its profit.

Major analysts have predicted that UST faces severe competition in the smokeless tobacco category, but like Goldman Sachs, I don't see it coming to light to the level predicted. While its dominance in the U.S. smokeless tobacco market went from an overwhelming 80% in 1998 to just north of 60% in 2006, it's taken a bigger hit in share price than deserved. You have only to watch Major League Baseball to see how chewing tobacco is still glorified, and Skoal and Copenhagen are still strong, well-known brands.

Type of Stock: A player in not only smokeless tobacco but also in wine, UST Inc. represents an overlooked opportunity due to market perceptions.

Price Target: I agree with Goldman's price target of $61 in the next year. Currently at $51.42, the stock is undervalued due to market perception of strong competition. Growth remains strong. And there may be an increase in the dividend before year's end. Further, UST may increase its share buy-back program.

Comments

[fxmaven:]

How can you recommend a tobacco stock with no international sales, and who is in the crosshairs of Phillip Morris USA? Altria has a lower multiple, and better international growth prospects, forget about PM USA and holding in SAB Miller, PM Investment Corp. The buys were BAT, Gallaher, Imperial Tobacco, and Altadis two years ago. Now, only Altria has any value left in the share price.

2007 Oct 18 06:18 AM