I have long been a fan of Universal Corp (NYSE:UVV), and right now I believe that the company is the best choice for investors looking to invest in the defensive international tobacco market. Indeed, Universal's recent set of quarterly results confirmed this view and presented a much better case for an investment than the results from tobacco giants Altria (NYSE:MO) and Philip Morris (NYSE:PM).
Universal bucked the industry trend
There is no doubt about it that Universal's fiscal third-quarter results were impressive. Net income for the quarter was $38.6 million, up around 9% year-over-year. This figure included $3.4 million of restructuring costs relating to the consolidation of some of the company's Brazilian operations. On a sales basis, Universal's revenue increased 18% year-over-year.
Furthermore, during the quarter Universal repaid $200 million of 5.2% notes as it replaced this loan with a new $175 million senior credit facility with an interest rate of LIBOR plus 1.5%; this comes out to approximately 2% at present, lower than the rate of the company's previous facility. As a result, interest costs declined by 9% year-over-year.
In addition, Universal had $192 million in cash at the end of the quarter and shareholder equity was up 9% year-over-year as the company's debt reduction and capital investments boosted its balance sheet.
Actually, these results came as no surprise as Universal's management had already told shareholders that second-half performance for fiscal 2014 would be stronger than it was in the first half due to the timing of tobacco crops. Management remains upbeat on the rest of the year and expects another strong quarter to end the fiscal year.
The future's bright
What does the future hold? Well, Universal's management is upbeat and they feel that initial indications point to a good performance for tobacco crops this year. Universal's financial year starts at the end of March, so when management talks about a good performance "this year," they mean the company will put in a strong financial performance for fiscal 2015.
That being said, management has registered lower demand of tobacco from cigarette manufactures as the volume of cigarettes smoked around the world declines. However, the company remains proactive with inventory management, keeping inventories at historically low levels. If demand slackens, Universal won't be left with high levels of unsold product.
In addition to Universal, both Philip Morris and Altria have reported full-year 2013 results in the last few weeks, and while not terrible, they were nowhere near as impressive as those of Universal.
Good results but worrying trends
What's most concerning is Philip Morris' declining margins as excise taxes on its products continue to rise. For example, for the full year of 2013 Philip Morris reported that its operating margin declined from 17.8% in 2012 to 16.9%. Meanwhile, the average rate of excise tax paid by the company on its tobacco products increased from 59.5% of revenue to 61%.
The other concerning factor is Philip Morris' currency exposure. Due to the strong US dollar the company's earnings for 2013 only rose by 1.7%, but after stripping out foreign exchange effects the company's earnings jumped by 8.3%. The company's management also expects the strong dollar to impact earnings by around $0.71 per share for fiscal 2014 -- a strong dollar and high excise taxes are two things Universal does not have to worry about.
Still, Philip Morris' partner in crime, Altria, put in a solid full-year 2013 performance within the US. Like all tobacco companies, Altria reported that cigarette sales had fallen during 2013. Unlike many of its tobacco peers, the company reported strong performance in other business divisions.
The volume of cigarettes shipped by Altria slid by 4.3% for the year, revenue from smokeless products jumped 5.1%, and sales at the company's Ste. Michelle wine subsidiary expanded by 8.6%. This sales growth in combination with margin improvements resulted in Ste. Michelle wine income expanding by 13.5%. All of Altria's smokeless divisions showed strong performance and the company collected $1 billion in income from its investment in SABMiller.
So all-in-all, Universal Corp's recent set of quarterly results continued to support the bull case for the company. Indeed, while Universal's larger peers Altria and Philip Morris struggle with sliding sales, there is still a strong demand for Universal's tobacco. Universal is possibly the only international tobacco company with sales expanding at a double-digit rate.