UST Fighting Discount Competition

UST Inc. (UST) has been steadily losing market share to discounters in the sub-premium categories over the last 15 years. The last seven quarters have seen a return of positive growth in premium moist smokeless can sales as a result of Project Momentum. However, margins are declining as the company looks to the lower-margin wine business for top-line growth. Hence, the rating is a Hold.

The primary investment thesis is that UST is a leading brand product company that exhibits consistent single-digit volume growth. As the industry leader, the management is able to enhance brand awareness and regularly raise prices, leading to 5 percent to 7 percent annual EPS growth over the long term, along with substantial cash flow generation for share repurchases and dividends. After losing market share for over a decade, the management is now focused on combating the discount competition and growing the entire smokeless tobacco category.

Like other tobacco companies, UST faces health-related litigation risk. Though UST’s risk profile is lower than that of the major cigarette companies, there is a perception that smokeless tobacco is as dangerous as cigarettes, especially as a potential cause of oral and pancreatic cancer. Currently there are several smokeless tobacco litigation cases pending in the courts. The company’s debt level and interest expense are also on the rise.

UST’s stock has traded in a P/E multiple range of 7 to 18 over the last five years. We expect the stock to trade in a P/E multiple range of 13 to 18. The target price of $57 is 16 times 12-month trailing earnings.

Read the full analyst report on UST