Universal Corp (NYSE:UVV)

CAPS Rating: 5 out of 5

The Company is a leaf tobacco merchant and processor, based on volumes handled by its subsidiaries and affiliates and has operations in agri-products.


Player Avatar heals07 (72.05) Submitted: 2/12/2011 5:47:04 PM : Outperform Start Price: $39.30 UVV Score: +21.66

Universal has multiple things working for it. But first lets look at the bad news. The largest consumer market in the world (US) has been in a multi generational usage decline. Health regulations and consumer healthy living trends will continue to put pressure on tobacco product consumption. Relief may come from the changing demographics of the US population. Fortunately consumers in far east countries are more inclined to consume tobacco products. Tobacco use in this area has been in a multi generation upswing. From a valuation standpoint appears to be undervalued based some simple DCF caluclations:Using Capm I came up with a cost of equity for UVV between 8.5% and 10% Using the gordon model I estimated a stock price of $47 by averaging 4 growth scenarios. These scenarios are 5.58% dividend growth, 6% dividend growth, 2.8% dividend growth, and 4.5% dividend growth. Over the past 30 years the stocks geometric average growth in dividends is 5.58%. Over 25 years the stocks dividends have grown at 6%, over the past 5 years the dividends have grown 2.8% a year, and the 4.5% is just an estimate of the company's sustainable growth rate.Using FCFE (free cashflow to equity) and the Cost of Equity estimates I estimated a perpetuity value of equity of $53.19. (to do this i accounted for the declining number of shares due to a 3% share repurchase program.)Finally using FCFF I first calculated ROC of 9.87% and estimated a wacc of 7.7%. I wasnt confident in my MV weight of Equity and debt so I increased I created three WACC estimates 7.7%, 8.9%, and 9.87%.. The first two estimates represent sustainable competative advantages and the last represents a UVV earning exactly what is necessary to keep capital. Averaging the three FCFF estimates I came up with an average value per share of $67.50. Interestingly enough if the UVV's wacc=roc the company's value is estimated to be $47.10.Total stock price estimate using these three DCF models I came up with a total stock price estimate of $55.95.Fundamentally the company has grown earnings 17% a year over the past 5 years. 8.8% a year revenue growth, 9% cashflow growth, has a 8.8% profit margin with a 7.47 pe, and a 5% yield everything here points to an undervaluation to me.

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