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$53.62 -0.05 (-0.09%)
8/20/2008 4:00 PM

UST, Inc. (UST)

CAPS Rating:
***

The Company through its direct and indirect subsidiaries, is engaged in the manufacturing and marketing of consumer products in the following business segments: Smokeless Tobacco Products, Wine and All Other Operations.

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Avatar staffier (66.20) Submitted: 10/05/06 2:22 PM : Outperform Start Price: $50.27 UST Score: 10.56

My bullishness stems from my belief that tobacco trends in the United States will start to resemble those of Sweden over the past couple decades, where tobacco usage has remained stable, but snus use has increased dramatically (and recently flattened).

To put some numbers behind this: There are now more adult snus users (1 million) in Sweden than there are smokers; and roughly 20% of Swedish males use snus. This was not always the case -- snus was once a niche market dominated by old men. However, more and more smokers took up snus to kick their nastier smoking habit. In 1986, 19% of Swedish males smoked, while 18% were snus users. By 2004, smokers dropped to 9% while snus users rose to 27%. Similar trends were witnessed with women, where smokers dropped from about 26% to 16%, while snus users increased from less than 1% to 9%. (Source: Scandinavian Journal of Public Health, 2005; 33: 321–324)

Obviously there are a number of (significant) differences between the US and Swedish markets, but I think one major reason smokeless tobacco is not as prevalent in the US is the lingering idea that smokeless tobacco is "as bad" for you as smoking. Recently, public health officials have been giving smokeless tobacco a fairer shake, although they still continue to distort reality, insisting that it is not a "safe" alternative, while neglecting to mention it is still 98% safer, for example. Eventually, the truth will get out on this one... Also, if we’re honest, we’ll admit that the majority of all tobacco users pick up the habit in an effort to "fit in." As more and more current users abandon smoking in favor of smokeless alternatives, more and more teens will be prone to imitation.

Long story short, smokeless tobacco in America today is a niche habit (dominated by Southern males). However, there are 45 million American smokers and only 7 million or so smokeless tobacco users, meaning there is a huge untapped market (including "white collar" individuals and women) for companies like UST.

Sign me up.

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Avatar staffier (66.20) Submitted: 10/26/06 10:53 PM

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I must admit I'm disappointed with the latest earnings. I’m also disappointed in UST’s overall strategy: the smokeless tobacco market’s biggest gains have come from the low-end, yet UST continues to focus on their high-end brands. Perhaps this strategy will pay off down the road (or let’s put it this way: it better), but if I were in charge of marketing, my primary focus would be on converting as many smokers as possible, even if it meant pushing cheaper brands. And then, after establishing a large base of smoking converts, I’d start luring those customers to the high-end.

However, I still remain bullish over the next 5, 10, even 20 years (assuming Philip Morris doesn't gobble them up, which would be a shame, because I really think UST could eventually grow to be PM's size). Despite what I consider a mediocre marketing job, UST owns some of the most dominant brands in a growing market...management would have to screw up quite badly to flatten (or decrease) earnings over the next few years.

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Avatar DemonDoug (99.95) Submitted: 6/22/07 5:02 PM

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I like the tobacco industry as defensive stocks heading into the end of a bull market (whether bull ends now or a year from now won't make that much difference, the writing is on the wall). I agree with your assessment: UST should be focusing on the low end, converting smokers. However, long term I see tobacco as almost like utilities with slightly higher growth upside. Great cash-flow, good dividend yield, very little to no debt, a steady base of customers (which UST may actually improve upon) with greater pricing power because there are large barriers to entry and not a lot of players. Also, with legal troubles now behind the tobacco industry, the chance of catastrophic loss or bankruptcy is nil. Right now, I think the p/e multiple on UST is a little too high, but tobacco prices have been steadily rising just like food and gas, and UST should be able to at least keep pace with the markets and inflation if not beat it if they improve their marketing and sales over the next few years. I too agree that they will outperform over the next 20 years, but I'm not sure about the next 5. I usually like to wait for a company to become a screaming buy, which would mean UST would have to drop into the mid to low 40's at least before I would consider a real-life stock purchase.

I also like MO (which I do own), RIO, RAI, and BTI, I think all of them have strong brands, good moats, good cash flow and debt positions, and are well-positioned to improve the earnings with increasing buying power of emerging markets as well as mitigating any inflation risk of the US dollar. UST is definitely the leader in smokeless and should continue to do at least as well as the industry.

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Avatar staffier (66.20) Submitted: 7/06/07 11:51 AM

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If you're into tobacco in general you should check out the Vice Fund (VICEX). It's a nice way to buy all the big names in gaming, tobacco and alcohol. The expense ratio is pretty big, but the fund has performed quite well over the past 5 years...more than enough to compensate.

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