Universal Corp Faces a Tough Fiscal 2015

It's been a while since I looked at the world's largest independent tobacco supplier Universal Corp (NYSE: UVV  ) .

However, the company has continued to outperform and recently reported a strong set of fiscal full-year results. Indeed, the company's fiscal 2014 results showed solid double-digit gains in operating income, net income, and earnings per share.

The results
Net income for fiscal 2014 was $149.0 million, or $5.25 per diluted share, compared with last year's net income of $132.8 million, or $4.66 per diluted share .

These results included a gain of $81.6 million from the favorable outcome of litigation in Brazil that related to excise tax credits for previous years. The results also included pre-tax restructuring costs of $10.8 million.

Unfortunately, weaker margins in Brazil because of higher green leaf costs, increased currency remeasurement impact, and exchange costs did impact segment results. Overall, revenue was up 3.3% compared with the previous year, as higher prices offset slightly lower volumes.

The outlook
But after a strong fiscal 2014, Universal's management believes that the company faces a tough 2015.

However, it's not market forces that worry Universal's management. Instead, short-term inventory movements are likely to impact the company's bottom and top lines.

Specifically, Universal has reported that fiscal 2015 has already gotten off to a strong start with some regions, especially within Africa, reporting higher production volumes than in previous years. On the other hand, management noted:

...due to declines in the U.S. and Western European retail cigarette sales, we may see some reductions in purchases of certain styles of tobacco, as customers adjust their inventory durations. Given the increased production and potential customer inventory adjustments, we expect an oversupply of tobacco in fiscal year 2015, which may lead to lower leaf prices that typify such cycles...

And it's pretty easy to pinpoint where this weakness is coming from, the world's fourth largest publicly traded tobacco company and one of Universal's main customers, Imperial Tobacco (NASDAQOTH: ITYBF  ) .

Inventory readjustment
Imperial Tobacco is trying to streamline its business model to reduce risk and increase cash conversion. As part of this drive, the company is working with wholesalers and distributors to reduce the amount of inventory they keep on hand.

In theory, this should allow the company to reduce the amount of time it takes for tobacco to get from factory to consumer.

In addition, another part of this efficiency drive involves Imperial shutting down cigarette factories in France and England, with the aim of saving £60 million for full-year 2014.

The cuts in inventory levels did hit Imperial's earnings during the first quarter. For the half year to March 31, revenue fell 5% to $21.6 billion. Management blamed this terrible performance on planned inventory reductions in a number of markets, although it reiterated its full-year earnings guidance .

Should you stay with Universal?
With a tough year ahead for the company, should you stay with Universal? Well, Universal's management remains optimistic about the future, continues to repurchase shares, and is committed to the company's dividend payout, which currently equates to a yield of 3.6%. 

Moreover, Universal is currently going through somewhat of a transition as the company tries to move away from tobacco. During the last few months the company has moved into the food ingredient business by providing tobacco growers with a new market for sweet potatoes, which are often grown in rotation with tobacco. 

Management has also taken Universal into the electronic cigarette business. The company is working with partners on a natural liquid nicotine for use within e-cigs which is extracted from tobacco plants.

Foolish summary
So all in all, Universal had a good fiscal 2014 but the company faces challenges going forward. Nevertheless, Universal's management remains committed to the company and continues to seek out growth opportunities.   

Overall, investors should not turn their backs on Universal just yet. The company has been around for nearly a century and it's not about to disappear just yet.  

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3024624, ~/Articles/ArticleHandler.aspx, 10/2/2014 4:44:22 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement