Some consider the tobacco industry to be in terminal decline as the number of smokers worldwide dwindles. One company in the industry is branching out, however, and it looks as if this diversification will turn Universal Corp (NYSE:UVV) into a pharmaceutical company.
Universal is a tobacco company, not a cigarette company. Universal grows and sources tobacco through a network of suppliers, farmers, and traders, and this business has kept the profits rolling in for decades. Universal is good at what it does; so good, in fact, that the company supplies all the major tobacco companies and even the state-controlled Chinese National Tobacco Company.
As more and more smokers around the world kick the habit, Universal's sales are going to come under pressure as cigarette manufacturers order less tobacco.
To counter this upcoming threat, Universal's management is branching out. Luckily, tobacco remains a highly desirable plant.
Tobacco is a life saver
Tobacco in its raw form as a leaf or plant is, somewhat surprisingly, a highly desirable product. The plant is used frequently as a homeopathic medicine, and more recently it has come to light that cells found within tobacco plants could help the fight against cancer. Scientists have also been studying tobacco's ability to assist in treating patients suffering from the deadly West Nile Virus.
As the world's leading supplier of tobacco, Universal could be about to unlock a new market. Universal is also pursuing other non-tobacco initiatives.
If you can't beat them, join them
Electronic cigarettes are perhaps one of the greatest threats to Universal's business model. The company has found a way of adapting to benefit from this trend, however. Universal's subsidiary Virginia Tobacco Company has joined with Avoca, one of the world's premier botanical extraction companies, to form AmeriNic.
AmeriNic was brought into existence with one goal: to produce liquid nicotine for the electronic cigarette industry. The company is focusing on producing high-quality United States Pharmacopeia (USP) grade liquid nicotine using fully traceable and compliant tobaccos.
Universal is capitalizing on the trend toward vegetable-based fruit drinks by supplying ingredients to the food and pet-food manufacturing industries in the U.S. and internationally.
The company plans to open a new juice and dehydration facility in North Carolina that will initially focus on sweet potatoes.
At first glance this move does not make much sense. However, sweet potatoes are often grown in rotation with tobacco, which makes the vegetable crop the perfect place to start for Universal's drive into the food market.
The company plans to spend about $20 million over two years on the facility, which will come under the ownership of the company's new subsidiary, Carolina Innovative Food Ingredients.
Nearly half of all the sweet potato production within the U.S. comes from North Carolina. Universal's plans to enter the food business are part of the company's long-term strategy. According to Universal's CEO George Freeman III:
...Universal continues to seek out growth opportunities that enhance our company's value and help to sustain tobacco growers...
Despite these initiatives, Universal has recently come under pressure Human Right Watch, which documented working conditions for children in four U.S. states. The organization found that many children working on tobacco farms were in contact with the plant and became ill as a result.
As the largest cigarette producer within the U.S., Altria (NYSE:MO) also had to take note to these findings. Altria does not employ its own farmers, as that's the job of Universal, but the company maintains strict standards regarding the producers it works with. Altria also supports several campaigns which aim to prevent the underage use of tobacco. This means that Altria should not find itself on the hook for this study.
According to CNN, children can legally work in tobacco fields, although the worry is that children's safety is under threat as the use of chemicals and poor working practices are common.
Overall, Universal's diversification away from tobacco and into the pharmaceutical and food industries makes the company look attractive as a play on tobacco. What's more, Universal's drive into the e-cig space should enable it to profit from the growth of the e-cig industry.
Rupert Hargreaves owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.