So what kind of world do we live in when the big bad earnings surprise is greeted by a quick drop, or a pessimistic yawn? Could be the world of smokeless tobacco, according to UST (NYSE:UST).
On Tuesday, the firm released first-quarter earnings that some might have expected to wow the Street, but perhaps, like me, everyone out there thinks the results are none too special. For the quarter, revenues came in at $433.6 million, lighter than analysts expected, and also 1.6% less than in the prior year quarter. (You can get all the gory details in our handy Fool by Numbers rundown.)
If you're still looking for fireworks on the bottom line, you need a cup of coffee, man. With so-so revenues and the current pricing climate for UST's smokeless tobacco, you'd expect the bottom line to shrivel a bit as well, and it did, by 4.9% on an absolute basis, or 2.7% by diluted share. (Share buybacks are handy that way.)
The continuing story here is softness in the premium chewing-tobacco market. Some of that is owed to competition for what have been some pretty fat profits. Of course, money brings competition like flies to a barbecue, and the latest evidence is that Reynolds American (NYSE:RAI) paid up $3.5 billion for UST rival Conwood. That's a hefty 7.8 times sales (or 14 times operating profit).
I'm also going to admit that I find management's "gas prices" excuse to be reasonable here. Given that a lot of tobacco products are purchased during trips to gas up the car, I have to believe that sticker shock at the pump is putting a damper on the non-essential purchases at the counter. I think you see the same thing -- and maybe a little bit of a healthy-living impact -- in recent results at Altria (NYSE:MO).
The drop in margins at UST -- across the board this quarter -- reflects slower sales of the high-priced goods. That's why I'm skeptical of management's insistence that results were "ahead of plan." I guess I'd like a better plan, maybe something more interesting than "strategic initiatives to increase premium brand loyalty," because what's that really, besides fancy talk for "We're puttin' 'er on sale, boys"?
There is some good news here, however. A nice 9.1% revenue increase for the wine segment, mostly on premium sales, brought the top line there to $56.3 million. That's a decent showing, especially in comparison, say, with the latest numbers from Constellation Brands (NYSE:STZ) or fizzy, flattish intoxicant dealer Anheuser-Busch (NYSE:BUD). One more thing: Don't be too excited about the 20% increase in UST's wine-segment operating profit, as a more than a quarter of that came from an asset sale.
In other OK news, value-priced smokeless cans increased at a respectable 5.8% rate, and market share data indicate that the pricing plan has shown some improvement. Still, if these attempts to win loyalty don't pan out after the sales end, it'll be tough for this investor to applaud the spending.
So why do I hang on? Good question. Exhibit A is that Conwood purchase. In (overly simple) terms, it implies that if someone ponied up the same kind of cash for UST, he or she would have to come up with 60% to 80% more than the going price -- not that I think that's likely. But the mere fact that the Street is even discussing a UST buyout illustrates why I'm still in here. Exhibit B? Strong cash flow. A stagnant UST is still worth a lot, and should management really weather the gas shock and kick-start sales, I think you'll see some action in these shares. In the meantime, there are worse things to endure than the tasty, 5.3% yield.
Anheuser-Busch is a Motley Fool Inside Value pick.
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Seth Jayson doesn't use the stuff himself, but he's not too proud to forgo the dividends it pays. At the time of publication, he had shares of UST but no positions in any other stock mentioned. View his stock holdings and Fool profile here. Fool rules are here.
