Universal Corp UVV

As of 4/26/2011

Background: Grower of all things tobacco, and some other crops including sunflower seeds. Dividend Aristocrat, operates at (best I could tell) a running duopoly with Alliance One International (a Seth Klarmin holding). Pretty solid analysis at Gurufocus.

Stats: 42.98/share, 989 million MC, EV/EBITDA: 6.13, P/B 1.03, 35% payout ratio on a 1.90 annual dividend (4.5%). 11.33% BV growth in past 10 years. P/S 0.4. Piotroski score of 5

Reason for cheapness: Not sure, most likely due to tobacco alliance and considered a crappy commodity. More research is needed but I'm having trouble nailing down the CF statements which has prevented me from buying on a whim.

Would buy?: Yes under BV. If I could get in under 40/share I'd purchase. Everything statistically is awesome and its fairly moated. Pretty good pricing power and this is a definite contrarian play. Although study after study says that tobacco usage is waning I find that hard to believe. Go to any, and I mean ANY, college campus and everyone smokes. Its like for every study that comes out extolling the destructive nature of tobacco more and more kids smoke. I don't know if its just that cool but it'd be just that cool to get in under 40.

10K readings look pretty solid as well, nothing fishy or crazy shenanigans, but I hope to read another year or two before (if) a precipitous drop occurs. Awesome insider ownership helps too with purchases occurring around BV.

Problems:
1. Possible financial issues? Seems remote but some more digging should uncover this and other things.


2. Tobacco really is waning: Yeah right. More kids at Cornell smoke then in an opium den in Bangladesh. And they were considered smart.

3. Litigation: I think they are fairly shielded from major issues due to not actually marketing the product. Have had some minor concerns in foreign lands, paying off officials but nothing to cause major disruptive issues. This is adequately provided for in the price.

With low valuations and a super dividend anything below BV looks quite capable to produce 10-15% annualized returns: based on BV increasing and dividend. Tobacco is one of the few crops that generally doesn't need to be subsidized and therefore will most likely stay as a staple for cash strapped 3rd world countries. Couple that with modest increase in tobacco consumption worldwide (1-3% annually I believe), I would feel comfortable making this a long term holding at the right price. Running as cheap as it does and operating as a duopoly with AONE I could also see a buyout occurring from MO or PM or BTI to shave costs and start vertical integration.
Cheers
Edit 5/6/2011: I think this is a pretty solid deal. It trades at a 10% discount to tangible book value. From what I can tell there are a couple of things holding it back/dropping it. 1. Worry that its being destroyed via large cigarette companies (PMI) buying out their farmers contracts. I think this is overrated because they are getting better than book value deals out of this and also this could backfire on the manufacturers part. A big part of UVV is their relationship with farmers. PMI doesn't have a working relationship (as far as I know) with the farmers. 2. Inventories are creeping up but some issues with crops have been always present. This is part of the farming business, some years are fat others are lean. Management is good and will learn and respond.
CEO holds 69,250 shares~2.9million. About 2/3 his 2010 compensation. Not much

6/11/2010: With the recent sell off I feel comfortable taking a position in this. Small for now (2%) on the belief that a further accelerated drop is in the cards. With a closing price of 37.00, a TBV of 45/share I see a ~20 margin of safety just to get to adequate levels. Reverse DCF shows an extreme drop in earnings is priced in (>10% at a 15% discount rate). A well run business in perhaps not the greatest industry, its truly a business that could be run by idiots. Management seems competent though. Order posted and Long UVV.
6/14/2010: Got about 4% of the portfolio in there (little overstated as large cash inflows should occur soon). Really felt it was about a 2% inflow. Next point of entry for averaging down will take place at 30/share. Otherwise I'm content sitting and waiting for the dividends to roll in.