Lower Margins on UST Growth
UST Inc. (UST) is the leading producer of moist smokeless tobacco products and dominates the premium sector of the domestic market. However, over the last 15 years UST has been losing its market share steadily to discounters in the sub-premium categories. The declines are also attributable to margin pressures in the smokeless tobacco segment, higher input costs, increased sales of lower margin Antinori products, continued investment in the Premium Loyalty Program and higher legal and professional fees.
In addition, the fourth quarter of 2007 was particularly challenging for the company with a major competitive entry in Atlanta (Marlboro snuff) and the integration of the Stag's Leap Wine Cellars acquisition. The last six quarters have seen a return of positive growth in premium moist smokeless can sales as a result of Project Momentum. In addition, the share repurchase program was tripled to $600 million in 2007.
However, margins are declining as the company looks to the lower margin wine business for growth. Hence, the rating is a Hold. UST's stock has traded in a P/E multiple range of 7 to 18 over the last five years. We expect UST's stock to trade in a P/E multiple range of 13 to 18. The target price of $55.25 is 15 times our 2008 year-end EPS estimate.
Near-Term Hold on Goodyear Tire
The Goodyear Tire & Rubber Company (GT) is one of the largest tire manufacturing companies worldwide. Goodyear Tire is benefiting from a major restructuring program along with lower raw material costs and improved selling prices.
Goodyear completed redemption of its outstanding $650 million of senior secured notes due 2011 on March 3, 2008. The redemption will result in annualized interest expense savings of approximately $75 million to $80 million, of which about $65 million will be realized in 2008. The company removed more than $3 billion in debt from its balance sheet.
Currently, shares of the Goodyear Tire & Rubber Company are trading at 10.2x our 2008 EPS estimate of $2.60. We believe the emergence of a healthier balance sheet and noticeably better sales from emerging markets will help earnings. Further, the restructuring initiatives undertaken and the savings from the new labor agreement will boost the future earnings. However, weak tire volumes compel us to rate the stock a Hold, with a six-month target price of $28.50, which implies a P/E 11x our 2008 EPS estimate.
Cadbury-Schweppes a Buy Again
The implementation of the Vision into Action Plan should stimulate revenue growth and improve the operating margin over time. Cadbury Schweppes PLC (CSG) has already become more focused with the purchase of Adams Confectionery and the divestiture of the non-core businesses, especially the European beverage business. With the de-merger of Americas Beverages expected in May, management will be able to leverage scale and improve profitability by focusing on the faster-growing confectionery business. A Buy recommendation has been re-initiated.
On March 31, 2008, management announced that Cadbury PLC ordinary shares will begin trading on the London Stock Exchange (LSE) on May 2, 2008 and shares of DPSG, Inc. will trade on the New York Stock Exchange (NYSE) on May 7, 2008. Management also provided an update on the de-merger of Americas Beverages ((Dr Pepper Snapple Group -- DPSG Inc.) and announced the financing and capital structure.
Cadbury Schweppes had a net debt outstanding of £3.2 billion ($6.4 billion) as at December 31, 2007.
