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Alliance One Is Still Risky, But New Business Lines Bring Upside Potential

Apr. 13, 2018 10:24 AM ETPyxus International, Inc. (PYX)3 Comments
Quinn Foley profile picture
Quinn Foley


  • Shares of AOI are up more than double since the company announced plans to expand into new and more profitable business lines.
  • The stock still trades at a low valuation though, and it isn't expensive compared to its own historical levels or in relation to Universal Corp.
  • Integration risk and high debt levels are weighing on valuation, and the concerns are understandable.
  • On the flip side, successful integration should result in shares trading at much higher multiples than they have historically.

Shares of Alliance One International (AOI) are up more than double since the company announced plans to expand into new business lines back in February. Still, the stock trades at low valuation multiples and isn’t particularly expensive compared to where it’s traded historically and in relation to direct competitor Universal Corp (UVV). Successful integration of AOI’s new businesses should see the company close its historical margin gap to UVV, and, in more optimistic scenarios, transition to much higher levels of profitability. But it’s clear the market has its doubts about management’s ability to integrate three new businesses while keeping the core operation running smoothly, and the company’s high leverage ratios add to the uncertainty. A discount is probably warranted in light of these risks, but AOI should trade at a higher multiple if management executes.

Business Description

Alliance is one of only two publicly held leaf tobacco merchants (the other being Universal Corp), each with similar market caps and global market shares. The company purchases, processes, packs, stores, and ships tobacco to manufacturers of cigarettes and other consumer tobacco products around the world.

AOI operates an extensive international network of processing facilities and holds a leading position in most tobacco regions in the world. The company purchases tobacco in more than 30 countries, with approximately 25% of purchases coming from North America and 75% from other regions, predominately China, Brazil, Turkey, and Africa. The United States is AOI’s largest market but accounted for just 15% of revenues last year, followed by China, Belgium, Germany, Russia, and Indonesia.

Alliance is a major beneficiary of multinational cigarette companies expanding overseas, which has increased the demand for the services of leaf tobacco merchants who can source and process tobacco on a global basis. Yet the level of competition AOI faces has increased as

This article was written by

Quinn Foley profile picture
equity analyst / macro. passed cfa level ii exam

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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