Meanwhile, Reynolds American, Inc. (NYSE:RAI) is also active in the not-tobacco nicotine sector. Reynolds American, Inc. (NYSE:RAI)’ subsidiary, Niconovum USA, has entered its first lead market in the United States with Zonnic, a nicotine replacement therapy gum, while another subsidiary, R.J. Reynolds Vapor, has introduced an electronic cigarette, VUSE, which has limited distribution.
Universal does not have a ax hanging over it
Universal’s non-tobacco product has not yet come to market, as it’s in the early stages of development, but the company seems much more appealing than both Reynolds American, Inc. (NYSE:RAI) and Lorillard Inc. (NYSE:LO) due to the continual threat of menthol cigarette regulation. More than 90% of Lorillard’s and 30% of Reynolds’ sales are menthol-related, so any ban here in the U.S. would rapidly slash revenue to a degree not even non-tobacco products could fill.
Universal is in a better position for falling sales
Universal is used to the irregularities of crops; therefore, the company keeps a relatively clean balance sheet, so there is no obligation to pay large amounts of interest on debt every quarter. In comparison, both Lorillard and Reynolds American, Inc. (NYSE:RAI) have been borrowing to buy back stock, to such an extent that Lorillard’s shareholder equity is now negative $1 billion (liabilities exceed assets), and Reynolds’ balance sheet is propped up with $8 billion of goodwill, without which, or on a tangible asset basis, the company has negative shareholder equity. On the other hand, Universal’s debt-to-equity ratio is 0.4 and the company’s current ratio is greater than 2 (both Reynolds American, Inc. (NYSE:RAI) and Lorillard have current ratios less than 1).
Foolish summary
Universal Corp (NYSE:UVV) is a good play on an industry that is otherwise considered to be declining. The company also has one of the best balance sheets in the tobacco sector, so there is plenty of room for additional investors returns.
On the other hand, the financial positions of Reynolds American, Inc. (NYSE:RAI) and Lorillard are fine at the moment, but declining sales could pile on the pressure in future years. Additionally, the threat of menthol regulation is an ax hanging over the industry.
All in all, Universal just looks to be the better choice.
The article This Tobacco Company Is Struggling to Keep Up With Demand originally appeared on Fool.com and is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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