As possible takeover target, UST share price soars
UST Inc. is facing increased competition as traditional tobacco companies clamor to get into the smokeless tobacco space.
But for the Greenwich company's investors, the trend is nothing to spit at.
The king of smokeless tobacco has seen its stock price rocket more than 25 percent over the past several months as Wall Street ponders the possibility that UST could be acquired for a premium price.
In February the stock hit a low of $38.04. Shares have recently been closing close to $50. The stock closed yesterday at $49.11 after hitting $49.94 on Friday.
There are several reasons why the Street is suddenly bullish on UST, said Nik Modi, senior tobacco analyst with UBS, which has its investment bank in Stamford. Last week, Modi raised his rating on UST's stock to 'buy 1' from 'neutral 1.' He also raised the stock's target price from $42 to $56.
In May Altria Group Inc., the parent company of Philip Morris, said it wanted to expand beyond cigarettes and get into smokeless tobacco. That raises the possibility that it may make a move for UST, the space's No. 1 player, Modi said.
Although Altria has said it may try to develop its own smokeless brand, until it does there will always be a premium on UST stock based on speculation that it will be purchased, Modi said.
'The fact is, it hasn't been purchased and Altria isn't in the space yet, so you can't rule it out,' he said.
What makes the possible sale of UST even more compelling is the acquisition that Altria competitor Reynolds American Inc. made of UST's top competitor, Conwood, in April.
Reynolds paid $3.5 billion for Conwood. Robert Campagnino, an analyst with Prudential Equity Group, estimated the acquisition price was 12.8 times earnings before interest, taxes, depreciation and amortization.
'We think the company paid through the nose for this business.' Campagnino wrote in a research note. He wasn't alone in his assessment.
'People were saying, 'Imagine if Altria would buy UST at those multiples,' ' Modi said. 'That put a little support on the stock, as well.'
In his report last week Modi wrote, 'While Altria has made it clear that it is looking at expanding its business into other tobacco companies organically, we are starting to believe that the company would be better fit to buy their way into moist smokeless tobacco, just like (Reynolds) did with Conwood.'
UST spokesman Mike Bazinet said he could not comment about the future of UST because the company is reporting earnings on Thursday. Further, he said, the company won't comment on anything that is speculative.
Modi said there are other factors that encouraged him to raise his rating on UST's stock.
Earlier in the year the stock was down in the high $30 range. The Street was concerned that Reynolds was going to launch its own Camel smokeless tobacco brand, Modi said. That didn't happen, and the stock recovered.
Finally, UST's sales volume trend is going up, he said. The company has had trouble with volume, but earlier this year UST implemented a comprehensive promotions strategy that enabled the company to grow sales.
UST also said it would implement a cost-cutting program. Modi said he expects that UST can save $100 million through 2008 by head count reductions, supply chain efficiencies and lower product returns.
Cutting costs will enable UST to reinvest in its top brands, allocate more resources into the retail trade and also to grow earnings, 'which has been elusive to them,' Modi said.
