It is unusual to see a tobacco company that is struggling to keep up with demand. Indeed, one of the biggest threats facing the tobacco industry right now is falling sales. However, demand for Universal Corp (NYSE:UVV)‘s tobacco is actually greater than what the company has the ability to supply.
Falling yields
Universal Corp (NYSE:UVV) is a tobacco leaf producer that, through its subsidies, grows and sells tobacco to the big tobacco players in the industry. Unfortunately, Universal Corp (NYSE:UVV) reported lower sales and revenues for the first half of this year, but these lower figures were a result of a fall in production. Crop sizes were affected within the U.S. by high levels of rainfall, and harvests from South America and Africa came in below estimates — exacerbating global conditions of undersupply in the tobacco market.
That said, the company notes that crops for 2014 are expected to produce a better yield, and demand for tobacco remains strong — so strong, in fact, that Universal Corp (NYSE:UVV)’s management noted within the second-quarter earnings report that uncommitted inventories remain at extremely low levels.
As I have already mentioned, it is unusual for a tobacco company to be noting such high demand for its products, considering the declining consumption of tobacco worldwide, which reinforces Universal Corp (NYSE:UVV)’s position as one of the best tobacco industry plays on the market.
Branching out
However, one thing that has been holding Universal back is its lack of diversification — in particular, its lack of exposure to the e-cig market, the newest and fastest-growing segment of the tobacco market. However, Universal Corp (NYSE:UVV) is on the warpath, and one of its subsidiaries has recently struck up a partnership with a premier botanical extraction company to produce liquid nicotine for electronic cigarettes.
This partnership should drag Universal into the 21st century, brining it into line with peers such as Lorillard Inc. (NYSE:LO) and Reynolds American, Inc. (NYSE:RAI), both of which already have electronic cigarette products on the market.
The competition
Lorillard Inc. (NYSE:LO)’s electronic offering comes in the form of blu eCigs, which at the end of the second quarter were available in 30,000 retail outlets and held a 40% share of the domestic market. Sales of blu totaled $114 million for the first six months of this year, and Lorillard Inc. (NYSE:LO) pocketed a 31.6% gross margin for the first three months of the year, followed by a 33.3% gross margin for the second quarter. These growing margins, along with lower expenditure after the initial launch of the product, led to a 250% quarter-on-quarter rise in net income for Lorillard Inc. (NYSE:LO) from the sales of blu.
Net income totaled $9 million for the first six months of the year. That said, net income from blu only accounted for 0.7% of Lorillard Inc. (NYSE:LO)’s total net income of $1,092 for the first six months of the year. Still, with tobacco sales declining, this could be a lucrative business segment for the company.
