UST Growth with Lower Margins

Source from:  Monday April 7, By Steven Ralston, CFA UST Inc.  04/08/2008

(NYSE: UST - News) is the leading producer of moist smokeless tobacco products and dominates the premium sector of the domestic market. However, over the last 15 years UST has been losing its market share steadily to discounters in the sub-premium categories. The declines are also attributable to margin pressures in the smokeless tobacco segment, higher input costs, increased sales of lower margin Antinori products, continued investment in the Premium Loyalty Program and higher legal and professional fees. In addition, the fourth quarter of 2007 was particularly challenging for the company with a major competitive entry in Atlanta (Marlboro snuff) and the integration of the Stag's Leap Wine Cellars acquisition. The last six quarters have seen a return of positive growth in premium moist smokeless can sales as a result of Project Momentum. In addition, the share repurchase program was tripled to $600 million in 2007. However, margins are declining as the company looks to the lower margin wine business for growth. Hence, the rating is a Hold. UST's stock has traded in a P/E multiple range of 7 to 18 over the last five years. We expect UST's stock to trade in a P/E multiple range of 13 to 18. The target price of $55.25 is 15 times our 2008 year-end EPS estimate. Enditem