Universal Corp Continues to Prove Itself as the Best International Tobacco Company

Universal Corp just released a great set of fourth-quarter results. Meanwhile, the results of peers Altria and Philip Morris were not as impressive.

Feb 15, 2014 at 11:56AM

I have long been a fan of Universal Corp (NYSE:UVV), and right now I believe that the company is the best choice for investors looking to invest in the defensive international tobacco market. Indeed, Universal's recent set of quarterly results confirmed this view and presented a much better case for an investment than the results from tobacco giants Altria (NYSE:MO) and Philip Morris (NYSE:PM).

Universal bucked the industry trend
There is no doubt about it that Universal's fiscal third-quarter results were impressive. Net income for the quarter was $38.6 million, up around 9% year-over-year. This figure included $3.4 million of restructuring costs relating to the consolidation of some of the company's Brazilian operations. On a sales basis, Universal's revenue increased 18% year-over-year.

Furthermore, during the quarter Universal repaid $200 million of 5.2% notes as it replaced this loan with a new $175 million senior credit facility with an interest rate of LIBOR plus 1.5%; this comes out to approximately 2% at present, lower than the rate of the company's previous facility. As a result, interest costs declined by 9% year-over-year. 

In addition, Universal had $192 million in cash at the end of the quarter and shareholder equity was up 9% year-over-year as the company's debt reduction and capital investments boosted its balance sheet.

Actually, these results came as no surprise as Universal's management had already told shareholders that second-half performance for fiscal 2014 would be stronger than it was in the first half due to the timing of tobacco crops. Management remains upbeat on the rest of the year and expects another strong quarter to end the fiscal year.

The future's bright
What does the future hold? Well, Universal's management is upbeat and they feel that initial indications point to a good performance for tobacco crops this year. Universal's financial year starts at the end of March, so when management talks about a good performance "this year," they mean the company will put in a strong financial performance for fiscal 2015.

That being said, management has registered lower demand of tobacco from cigarette manufactures as the volume of cigarettes smoked around the world declines. However, the company remains proactive with inventory management, keeping inventories at historically low levels. If demand slackens, Universal won't be left with high levels of unsold product.

In addition to Universal, both Philip Morris and Altria have reported full-year 2013 results in the last few weeks, and while not terrible, they were nowhere near as impressive as those of Universal.

Good results but worrying trends
What's most concerning is Philip Morris' declining margins as excise taxes on its products continue to rise. For example, for the full year of 2013 Philip Morris reported that its operating margin declined from 17.8% in 2012 to 16.9%. Meanwhile, the average rate of excise tax paid by the company on its tobacco products increased from 59.5% of revenue to 61%.

The other concerning factor is Philip Morris' currency exposure. Due to the strong US dollar the company's earnings for 2013 only rose by 1.7%, but after stripping out foreign exchange effects the company's earnings jumped by 8.3%. The company's management also expects the strong dollar to impact earnings by around $0.71 per share for fiscal 2014 -- a strong dollar and high excise taxes are two things Universal does not have to worry about.

Tobacco conglomerate
Still, Philip Morris' partner in crime, Altria, put in a solid full-year 2013 performance within the US. Like all tobacco companies, Altria reported that cigarette sales had fallen during 2013. Unlike many of its tobacco peers, the company reported strong performance in other business divisions.

The volume of cigarettes shipped by Altria slid by 4.3% for the year, revenue from smokeless products jumped 5.1%, and sales at the company's Ste. Michelle wine subsidiary expanded by 8.6%. This sales growth in combination with margin improvements resulted in Ste. Michelle wine income expanding by 13.5%. All of Altria's smokeless divisions showed strong performance and the company collected $1 billion in income from its investment in SABMiller.

Foolish summary
So all-in-all, Universal Corp's recent set of quarterly results continued to support the bull case for the company. Indeed, while Universal's larger peers Altria and Philip Morris struggle with sliding sales, there is still a strong demand for Universal's tobacco. Universal is possibly the only international tobacco company with sales expanding at a double-digit rate.

So does that make Universal the Fool's favorite stock?
Overall, Universal is a good stock, but there's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Rupert Hargreaves owns shares of Altria Group and Universal. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers