I have commented on the value available at Universal Corp (NYSE:UVV) previously, however, after its first quarter earnings release and subsequent 19% decline from the stock’s high seen during the first week of August, the company now looks even more attractive.
Universal’s first quarter results reiterated the company’s potential as a value investment. Current assets covered current liabilities 1.5 times, debt is only 20% of assets, cash is worth $5 per share and the company’s net asset value per share stood at $55.60, up from $53.9 at the end of the second quarter.
However, the company has been heavily sold-off during the past week or so for two reasons. Firstly, company COO W Keith Brewer sold 15,887 shares on August 9th, which was 10% of average daily volume.
Universal Corp’s first quarter earnings
Secondly, Universal Corp (NYSE:UVV)’s first quarter earnings were, in a word, poor. The company reported net income of $58.3 million or, $2.05 per diluted share. However, this was including the one-off gain of $81.6 million, or $1.98 per diluted share resulting from the favorable outcome of the Brazilian excise tax case. Excluding this gain, net income slumped $17.9 million from the same period last year to only $5.2 million.
There is no denying the fact that these results are terrible, a year-on-year decline in net income of 80% is shocking, however, Universal’s second quarter was affected by a lack of supply, not demand. Indeed, management notes in the Q1 earnings conference call that, “in the United States where crop sizes have been negatively impacted by recent high levels of rainfall. Burley crop levels are down from earlier projections in some origins, exacerbating the undersupply conditions expected for that type of tobacco this year. In addition, global demand is strong, and we are seeing volatile green tobacco prices in Brazil that have disrupted markets and pressured margins there.”
Moreover, on the conference call, CEO George Freeman stated that he was amazed how strong tobacco demand has been so far this year.
So, demand for tobacco around the world remains strong and the only thing holding Universal back is the lack of supply in the market, and volatile prices pressuring margins.
Still, management hassaid that they expect the second and third quarters of the years to produce strong results, as crops are already being planted and good yields are expected.
Changing with the times
Of course the demand for tobacco worldwide is slowing and Universal Corp (NYSE:UVV)’s management expects sales of tobacco to be slightly down this year from fiscal 2013. Although, it would appear that this is not a declining trend and the company’s sales have been relatively flat over the past four years.
However, Universal is now taking action to avoid the decay in the global market for tobacco. Alongside Q1 results,Universal Corp (NYSE:UVV) announced that one of its subsidiaries has formed a business partnership with a premier botanical extraction company, to produce liquid nicotine for use in electronic cigarettes. This should help Universal boost sales over the medium term with much higher and more stable margins. Additionally, I should note that Universal is the only company doing this that is based within the U.S., giving the company a strong competitive advantage.
All in all, the original criteria that established Universal Corp (NYSE:UVV) as a potential value investment still stand and the stock’s recent decline only makes the company look more attractive.