While Others Struggle, This Tobacco Company Has Plenty to be Happy Abouthttp://www.fool.com/investing/general/2014/01/31/while-others-struggle-this-tobacco-company-has-ple.aspx Rupert Hargreaves
January 31, 2014
It is unusual to see a tobacco company that is struggling to keep up with demand. Indeed, one of the biggest threats facing the tobacco industry right now is falling sales, and this something that Lorillard (NYSE: LO) and Reynolds American (NYSE: RAI) are having to grapple with. However, demand for Universal's (NYSE: UVV) tobacco is actually greater than the company has the ability to supply.
That said, the company notes that crops for 2014 are expected to produce a better yield, and demand for tobacco remains strong -- so strong, in fact, that Universal's management noted within the fiscal second-quarter earnings report that uncommitted inventories remain at extremely low levels.
As I have already mentioned, it is unusual for a tobacco company to be noting such high demand for its products, considering the declining consumption of tobacco worldwide, which reinforces Universal's position as one of the best tobacco industry plays in the market.
Universal is seeking to capitalize on this trend and recently embarked on a program to increase its production capacity within Mozambique. Similarly, other smaller-scale projects are currently in development in several other regions to enhance local processing and leaf services. All in all, the company plans to spend $50 million upgrading existing facilities.
This partnership should drag Universal into the 21st century, bringing it into line with domestic peers such as Lorillard and Reynolds American, both which already have electronic-cigarette products on the market.
Still, with tobacco sales declining, and when marketing costs fall, this could be a lucrative business segment for the company. At the end of the third quarter, Lorillard acquired SKYCIG, a British-based e-cig business .
Meanwhile, Reynolds American is also active in the not-tobacco nicotine sector. Reynolds' subsidiary, Niconovum USA, has entered its first lead market in the United States with Zonnic, a nicotine replacement therapy gum, while another subsidiary, R.J. Reynolds Vapor, has introduced an electronic cigarette, Vuse, w