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UST Cashes In on the Anti-Smoking Movement

While I was back in New York this past weekend, it was nice to be able to meet up with friends at a bar for a few pops and then be able to exit the establishment without having my clothes saturated with smoke. Smoking is now banned in bars and restaurants in New York and a handful of other states, and there is a push for increased restrictions nationwide. UST (NYSE: UST  ) stands to capitalize on this trend in a big way.

UST is the holding company for U.S. Smokeless Tobacco Company, which recently began test-marketing its first-ever spit-free smokeless tobacco, Skoal Dry. While this form of tobacco probably wouldn't have been the snuff of choice for Lenny "Nails" Dykstra or any of the other 1986 New York Mets, it does present adult smokers with a more discreet method of quelling their nicotine cravings.

Despite its run-up to a recent 52-week high of $54, I still view the stock to be a sound value play. UST offers shareholders a healthy 4.3% dividend yield and trades at a satisfactory P/E of 16.52, roughly in line with its peers. The strongest evidence that the stock has an acceptable valuation is the fact that the company itself repurchased 1.1 million UST shares at a cost of $50 million during the second quarter.

While the company recently reported that its second-quarter profits were 1% lower than its 2005 second-quarter net income, I would not be overly alarmed or view this slip as being indicative of a long-term concern for UST. The drop was primarily attributable to the company's increased investment in marketing costs for its premium tobacco brands. The spike in selling, advertising, and administrative costs should only be temporary. Murray S. Kessler, UST's president and chief operating officer, pointed out, "During the quarter, we embarked on a company-wide cost reduction initiative, called Project Momentum, with savings targeted at more than $100 million over the next three years."

In terms of the company's legal and economic environments, both are encouraging. Major litigation in the industry has focused on cigarette makers, and the company has had only limited involvement historically with cigarettes. Should the currently favorable litigation scene for tobacco companies experience a turn for the worse, UST would face minimal exposure, as its current percentage of total tobacco industry sales is relatively small. It would be companies like Altria (NYSE: MO  ) and Reynolds American (NYSE: RAI  ) that would experience more fear of having their coffers raided.

From an economic standpoint, cigarette sales have been declining nationwide to the tune of 2%-3% annually. Smokeless tobacco products, on the other hand, have experienced much better fortune. Sales have been growing at a rate of 4%-5% per year.

All in all, I believe Fools can look at UST as a solid value stock that has already begun to reap the benefits of the anti-smoking movement in the United States. The stock's generous dividend yield, coupled with a reasonable valuation, give it the foundation for a good run -- possibly even one comparable to that of the 1986 Mets.

Want more forward-thinking advice on great value stocks? TryMotley Fool Inside Valuefreefor 30 days. The newsletter's lead advisor, Philip Durell, and his team are always seeking out companies poised to bring in great returns.

Fool contributor Billy Fisher does not own shares of any of the companies mentioned, but he is a lifelong New York Mets fan. The Fool's disclosure policywill never go up in smoke.

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