Tobacco maker UST (NYSE: UST ) is primarily known for its smokeless tobacco products, but it was the company's wine sales that really surprised me. The company as a whole reported mixed results for its 2006 Q4. The net effect was positive for shareholders, as the stock was trading up 2.5% yesterday during midday trading action.
UST's wine segment scored record sales and operating profits during the quarter. Operating profit for this division increased 26.6% on a 26.3% increase in net sales versus the year-ago quarter. Much of the increase is attributable to the continued success of the company's premium wine brands. Premium case sales increased by 22.1% when compared to the year-ago quarter.
It should be noted that wine sales only account for about 19% of the company's sales. Overall, UST's net sales increased 2.4% in the fourth quarter on a year-over-year basis. Net earnings, on the other hand, decreased by 4.5%. This decrease in earnings is due in large part to unbudgeted restructuring charges and the reversal of income tax accruals.
On the surface, it might also appear that the company's smokeless tobacco segment suffered, as its net sales decreased 2.2% versus the year-ago period. However, the decline is the result of UST offering customers reasonable prices on the company's premium brands in an effort to build up brand loyalty. This preliminary goal was successful, as the unit achieved increased sales volume during the quarter. Net unit volume for the company's premium-brand moist smokeless tobacco sales increased by 1.7% from the year-ago quarter, and value-brand net unit volume increased by 7.8%.
Going forward, UST will face strong competition in the smokeless tobacco arena from Reynolds American (NYSE: RAI ) , whose 2006 acquisition of Conwood has made the company a legitimate force in the industry. Altria (NYSE: MO ) is also presently test-marketing its own brand of smokeless tobacco called Taboka.
Today's revelation of the emerging strength in UST's wine segment demonstrates the value of a well-diversified product portfolio, and wine should continue to boost the company's bottom line. UST trades at a modest P/E of 18.34 and consistently ups its quarterly dividend payment amount on an annual basis, and its stock presently carries a dividend yield of 4.1%. This company might not be the most glamorous stock, but it makes for a solid large-cap value addition to any portfolio.
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Fool contributor Billy Fisher does own shares of Reynolds American and Altria. The Fool's disclosure policy will never go up in smoke.