Given the low margins, and low growth, for the wholesalers, and given the low barriers to entry that lets new entrants like Premium come in and create price competition, do you think Tobacco wholesale is even a business worth holding?
What do you think of the bonds for either UVV or AOI? I'm looking for an appropriate higher yield holding for an older person's income portfolio.
AOI's bonds had a huge run up in the last month. I see that two of them have potential calls in August 2009. Did something happen in the last month that would make the market think those bonds will be called early?
I think the best way I can try to answer your question and that of other posters is to say that I am a long term holder of UVV and AOI, and why. When the price gets frothy, I sell, and then I buy back in when it is low. In my opinion, the cig manufacturers hold nearly all the negotiating power in this business as they hold the brands and there are not very many of the manufacturers left. They will either ensure AOI and UVV continue to exist, or buy them out. Setting up leaf dealing operations in difficult countries all over the world is the last thing a sane cig manufacturer should want to do, as JTI may be about to find out if that is what its acquisition of Tribac means. Despite the apparently risky nature of UVV and AOI I therefore think there is almost no chance either will go bankrupt whatever happens. Both companies ought to be able to pay a steady dividend as UVV already does. I have great belief that AOI will get there too. There is some scope for capital gain on UVV and I think quite a lot on AOI. Although barriers to entry are low in some ways, they are very high in the sense that on a really long term outlook, this business may well not exist as a legal business in 30-50 years time. Also, as Premium knows well, it can only successfully enter a new market with the backing of a significant customer, which it won't always get.
Do you have an opinion on what kind of return on equity AOI can turn in for the next few years? Yahoo shows 49% ROE last year, and that is obviously not sustainable.
My own guess using UVV's ROE was that AOI might turn in a 10% to 12% ROE. Given they trade near book value, that might be okay for a recession-resistent stock, but clearly it's hard to make a case for a huge win.
If you had to guess would you think that either of these companies will have any problems paying back existing debt at maturity? Do you foresee either of them having any needs for substantial additional debt financing?
Your knowledge and analysis is very helpful. I read the latest AOI covneants which prohibit paying dividends until quite stringent requirements are met...so it would appear UVV has appreciation + divident return while AOI offers a greater potential price appreciation(?). Thanks again for your patience to explain.