Active Trader Update
360 Degrees of UST
RealMoney Staff
12/07/06 - 04:17 PM EST
Editor's Note: In this edition of "360 Degrees," RealMoney commentators take a closer look at tobacco company UST (UST Quote).
TheStreet.com has always believed that offering a wide variety of opinions and viewpoints -- rather than a monolithic "house view" -- helps readers make better-informed investment decisions. In that spirit, we bring you "360 Degrees."
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Chew on Chances of a Bid for UST
By James Cramer This was originally published on RealMoney on Dec. 7 at 9:02 a.m. ET. How can UST stay public? How can the No. 1 smokeless tobacco company, with a 4% yield, still be independent in the face of chatter about Japan Tobacco bidding for the U.K.'s Gallaher Group -- Benson & Hedges to you! I've liked UST since below $40 and I have to tell you that even though it has ramped to $57, it's still a bargain. This category is strong and the tobacco companies need growth. UST pays a safe 4% yield, has the best brands in the group -- Copenhagen and Skoal -- and also has a good wine company, with red wine being a hot commodity for its much-touted health benefits. I have believed that the moment Altria (MO Quote) splits up, UST could be purchased. But maybe you have to get in ahead of time, with a nice trampoline of a dividend underneath. UST is too cheap, still. With the tobacco consolidation at last here and British American Tobacco, Imperial and Altria all eying Gallaher, too, according to the Financial Times, you have to think that one of the companies that doesn't get Gallaher will go for UST. At the time of publication, Cramer was long Altria.
UST: A Wallflower at Bidding Ball
By Charles Norton This was originally published on RealMoney on Dec. 7 at 2:33 p.m. ET. A wave of consolidation in the tobacco sector could be in the works. This thesis got a spark from yesterday's news that Gallaher (GLH Quote) had been approached by an unnamed suitor, probably Japan Tobacco. Shares of Gallaher, whose cigarette brands include Benson & Hedges and Silk Cut, surged on heavy volume Wednesday and are up about 3% today. So who might be next in line to get a bid? Some possible takeover candidates include Swedish Match, a maker of snuff, and Spain's Altadis. Imperial Tobacco (ITY Quote) could also join the fray. But contrary to Jim Cramer's post, however, I don't think UST (UST Quote) is likely to get bought out. Yes, the moist smokeless-tobacco category is extremely robust. While it's a fraction of the size of the cigarette market, its growth is tremendous, with unit volume growth recently topping 10%. It's also true that UST, which makes Skoal and Copenhagen brands, is the market-share leader in smokeless tobacco. But here's the rub. First, if you take a closer look at the smokeless-tobacco category, the real growth is coming from the discount segment, with unit volume growing at nearly a 25% clip. In fact, the cheapest-priced brands are rapidly gaining share. Earlier this year, Reynolds American (RAI Quote) jumped on this trend, buying privately held Conwood, the No. 2 smokeless-tobacco maker, specifically to enter the low end of the category. So the value segment now has the backing of Reynolds, and it's taking share at a fast clip. For example, Reynolds' low-priced Grizzly brand now owns nearly 20% volume share of the overall smokeless category. Some reports I've read indicate the total value segment could achieve 50% of the volume share in the next few years. The pricing gap between the premium segment and the discount segment is widened further by a state excise structure that is based on price. For example, while the excise tax on cigarettes in a flat price per pack, the state excise tax on smokeless tobacco is a percent of wholesale price: the higher the price, the higher the tax. California's excise tax on smokeless tobacco is 46.76% of the wholesale price, and Massachusetts, while it's a much smaller market, slaps an excise tax equal to 90% of the wholesale price. This further works against UST's higher-priced, premium brands. All of this has directly resulted in erosion of UST's market share in the smokeless market: from more than 68% in late 2004 to around 62% today. If you look at a chart of UST's market share, it looks like the back side of the tech bubble: a complete and steady decline. The tobacco companies are well aware of these trends and would not pay a premium for UST when it is drastically losing share and is poorly positioned within the category. Philip Morris USA, a unit of Altria, in fact, might launch a Marlboro-branded moist smokeless-tobacco product of its own, which would deflate many UST-watchers who are hoping among all hope that Philip Morris USA will buy UST. Besides competition from the likes of Reynolds and Philip Morris, Loews' Lorillard (tracked by Carolina Group (CG Quote), said last month that it has entered an agreement with Swedish Match to sell smokeless tobacco products in the States. So while I think the Gallaher news might indicate further consolidation in the tobacco sector, which is good for all of the major cigarette makers, I don't believe UST is in the crosshairs. At the time of publication, Norton was long Gallaher, Altria, Reynolds American and Imperial Tobacco.
UST: The Technical Take
By Dan Fitzpatrick How risky is it to buy UST at these levels? It depends on your time frame. Let's look at first at the daily chart.
