Growing Green By Supplying the Next Generation of Smokers in Emerging Markets

27-Jan-2011

I like this.

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Liu-Yue (Louie) Lam, Co-Founder, CEO & Chief Investment Strategist, Oxstone Capital Management,

UVV, Universal Corp – USA, $37.80, 1/20/2011

Universal Corporation is the world’s largest leaf tobacco merchant and processor.  The company processes a wide variety of tobaccos. Its flue-cured, burley, and oriental tobaccos are used principally in the manufacture of cigarettes; and dark air-cured tobaccos are used in the manufacture of cigars, pipe tobacco, and smokeless tobacco products.

UVV is currently trading very cheaply at just 7.7x P/E and price to sales of just .38.  UVV has strong net margins of 6%+ for a commodity-like business, which shows it commands market power.  It currently sports a fat dividend yield of 4.9% with room to grow as earnings continue to rebound and current payout ratio at only 37%.  More importantly UVV is temporarily trading near multi year lows and even dipping below its book value.  There appears to be plenty of upside potential in this stock.  Insiders seems to believe so too as they own 6% of the company. A review of some its institutional holders include the highly respected small cap value firm – LSV and famous contrarian asset management firm Dreman.  This provides a clue to what the smart money thinks about this company.

A recent negative industry report predicted that smoking may disappear within the next 20+ years.  This report caused a small panic among some investors, but also created a terrific buying opportunity for other investors.  UVV has a long operating history; founded in 1888.  This shows the enduring strength and sustainability of its business.  Consumers in the developed world may be cutting back on smoking, but it is highly unlikely that smokers will give up their smokes completely.  Tobacco is highly addictive and price inelastic in the short to medium term.

Just as one door closes, another door opens.  As the developed world consumers develop healthier habits, there are plenty of new emerging market consumers joining the new smokers’ class.  Most emerging market economies are still in the industrialization phase and in many of these countries smoking is still a very widely accepted cultural norm.  In addition, in these countries, regulations are less restrictive to tobacco companies and consumers widely accept the guilty pleasures of a smoke.  I have personally observed countless individuals smoking freely on recent travels in several emerging eastern European countries – Romania and Ukraine.  On a more alarming note, a recent video was shown internationally of a small baby in Indonesia enjoying smoking dozens of smokes a day.  This shows the alarming dangers of just how highly addictive smoking can become especially to the millions of growing youths in Asia and Middle East/Africa.  Therefore many tobacco companies and their supplies like UVV will continue   exporting their wares to many emerging market economies unabated in the near to medium term future. The continued weakness in the dollar will only add fuel to their profits.  UVV is one company that will stand to benefit from this alarming emerging market consumer trend to smoking.

This is also a terrific defensive consumer staples play while also providing an added benefit from riding the secular trend in agriculture and emerging market consumers spending booms.  UVV provides a very safe and easy way to earn solid total (dividends and capital appreciation) returns with dividend yields already near 5% it does not take much capital appreciate to earn double digit returns.

I’m betting that UVV will not only be standing around years from now, but also growing from supplying the new emerging smokers around the world.


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