Universal: Better Balance Sheet, Valuation, Business Model Than PeersVW Staff
Currently, cigarette companies do not look attractive to value investors. The historically defensive industry has been on a rally for the past few years and any value oriented investors who did not buy in before the rally began, are now left with almost no opportunities. However, there is one stock that many seem to have under-looked; tobacco grower and distributor Universal Corp (NYSE:UVV).
Despite basically being in the same business as cigarette manufactures, Universal is a relatively unloved company. Indeed, on a valuation basis, it appears as if investors, and the market as a whole, have almost no trust in the company.
Universal Corp (NYSE:UVV) trades at a EV/Revenue multiple of 0.7x, compared to larger peers Altria and Philip Morris, which trade at ratios of 4.4x and 5.1x times respectively. Additionally, on an EV/EBITDA basis, Universal still looks cheap, trading at a multiple of 6.2x compared to 9.6x and 10.8x for Altria Group Inc (NYSE:MO) and Philip Morris International Inc. (NYSE:PM).
But why is Universal Corp (NYSE:UVV) a better investment than either Altria or Philip Morris?
At first, Universal's strengths are not obvious, the company distributes tobacco, which is then used by giants like Philip Morris International Inc. (NYSE:PM) to manufacture cigarettes. This is Universal's biggest strength as while the company does not actually manufacture cigarettes, it would appear that growing and selling tobacco is actually a more defensive industry.
Indeed, it is well known and documented that cigarette consumption around the world is in gradual decline, as consumers realize the negative health consequences. That said, the consumption of tobacco, through both smoking and chewing is actually on the rise and Universal is in the right place to benefit.
According to the Centers for Disease Control and Prevention, global cigarette consumption has been in decline for the last ten years. On the other hand, the CDC notes that the consumption of pipe tobacco and large cigars has risen 482% and 233% respectively, and over the past ten years, the use of non-cigarette smoked tobacco has risen 123%.
Furthermore, aside from the tobacco market, Universal, unlike its peers is extremely fiscally prudent. In particular, companies like Philip Morris and Altria Group Inc (NYSE:MO) are repurchasing stock that is financed with debt, currently a sensible idea considering the low interest rates currently available in the market, although, over the longer term this practice could prove to be unsustainable when interest rates start to rise again.
In comparison, Universal Corp (NYSE:UVV) has been buying back stock with cash on hand, only using debt when necessary. As a result, at the end of Q1 this year, the company's net debt position stood at around $130 million ($370 million cash and $500 million debt), a gearing level of 10%. Current and Quick ratios stood at 2.8 and 1.5 times respectively. Moreover, the company's current assets covered all liabilities both long and short term 1.7 times.
On the other Philip Morris International Inc. (NYSE:PM) and Altria Group Inc (NYSE:MO) are in a much worse financial position. Neither company has a quick ratio greater than one and Altria Group Inc (NYSE:MO)'s debt is equal to more than three times shareholder equity. Unfortunately, due to large amounts of borrowing, Philip Morris has negative shareholder equity so a gearing ratio is impossible to calculate.
Universal Offers Many Benefits Over Its Peers
Universal Corp (NYSE:UVV) offers many benefits over its peers but one of the more important points that value investors should pay attention to is the company's asset value per share, which currently stands at $44.80, with 35% or, $15.78 per share in cash. Currently, trading at $57.80 per share Universal is trading at a P/B ratio of 1.3 — below the majority of its peers and approaching value territory.
So all in all, Universal Corp (NYSE:UVV) presents a compelling value opportunity in a defensive sector that currently trades at valuation unattractive to value investors. Additionally, the company is more diversified than its relatively expensive peers and is still experiencing strong a demand for its tobacco.