You won't find a lot of love on the Street for UST (NYSE:UST) today. After all, the world's smokeless tobacco leader reported lower earnings, negative shareholder's equity, and has managed free cash flow of nearly minus $1 billion for the past six months.
What good can be said about these latest results? More than you think.
First, the bad news: UST's premium wines division felt the pinch. For the period, revenues dropped 11.8% in a truly nasty overall wine market. Perhaps consumers finally woke up to the fact that just because Chateau Ste. Michelle sounds French doesn't necessarily mean it is French?
For me, this would be really bad news were the overall wine market in better shape. In fact, Chalone (NASDAQ:CHLN), Robert Mondavi (NASDAQ:MOND), and Brown Forman (NYSE:BFB) all reported similar weakness in case volumes and pricing. Moreover, while wine sales comprise 10% of total revenues -- and poor results indeed weigh on margins -- this does not represent anything approaching a crisis.
Now the good news: Revenues from UST's smokeless tobacco division -- best known for Skoal, Copenhagen, and Red Seal -- were up 2.5%. The fact that this was despite a fall in total volumes implies that UST enjoyed better pricing on its core products.
Meanwhile, a hefty ($1.2 billion) payout related to a 1999 lawsuit pummeled UST's cash-flow results, drowning out otherwise positive operating free cash flow of $263 million for the past six months. (Though to be evenhanded, backing out the lawsuit, free cash flow in the last two quarters of $120 million and $143 million, respectively, still fell below 2002 levels.) Finally, the payment effectively wipes out more than $1 billion in shareholder equity but should have no effect on future results.
Bottom line: While advertising expenses and increased cost of goods sold have eaten into results, I believe the setback will prove temporary. UST has a penchant for buying back shares when they are inexpensive and rewarding shareholders with a generous dividend -- the stock currently yields 5.7%. These most recent results, while certainly not barnburners, do not lead me to conclude that UST is in any sort of decline.
Bill Mann owns shares of UST.
