The Daily Double: Thursday, June 19, 1997, Culbro Corp. (NYSE: CBO)

Thursday, June 19, 1997

Culbro Corp.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBO)") else Response.Write("(NYSE: CBO)") end if %>
Phone: 212-448-3800
Price (6/19/97): $145 1/2

HOW DID IT DOUBLE?

Culbro stock has been smoking, puffed up from $55 a share in mid-December to a high of $142 5/8 by the cigar craze and corporate restructuring designed to show off its stogie business.

Investors often have trouble valuing conglomerates. Frustrated shareholders sometimes end up calling for one or more businesses to be sold or spun off so the hot division can trade at a PE multiple commensurate with its growth. Culbro offers a great example of how such maneuvers can increase shareholder value.

The details are tangled, but basically Culbro has sold off some assets and split its remaining business into cigars (90% of sales) and Griffin Land & Nurseries, which consists of various real estate holdings and nurseries with declining revenues. On February 28, Culbro took GENERAL CIGAR HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MPP)") else Response.Write("(NYSE: MPP)") end if %> public, selling 6.9 million Class A shares (a 26% stake) for $20 each. That made Culbro's remaining 74% stake worth nearly twice Culbro's entire market value back in December.

Thanks to its purchase of Villazon tobacco, which it bought with the IPO proceeds, and to stronger sales of premium cigars and increased prices in all cigar categories, first quarter sales for the cigar business came in at $49.8 million, 73% above the year-ago numbers. As General Cigar's shares traded up to $30, Culbro stock followed. In early June, happy shareholders voted to spin off all the non-tobacco assets into a new public company and to merge Culbro and General Cigar, with each Culbro share being swapped for about 4.45 shares of General Cigar Class B.

BUSINESS DESCRIPTION

Based in New York City, Culbro is now principally a stockholder of General Cigar. That company's top-selling Macanudo and Partagas premium cigar brands account for more than half of sales. The company also has a strong presence in mass-market cigars, including the Garcia y Vega, White Owl, and Tiparillo brands. General Cigar also owns 1,100 acres of land, its Park Avenue headquarters, and Club Macanudo, Inc.

Culbro's non-tobacco interests include a landscape nursery business, real estate holdings in New England (including the development around Thoreau's Walden Pond), and a 50% stake in tobacco wholesaler Eli Witt.

FINANCIAL FACTS

Income Statement

      12-month sales: $225.4 million
      12-month income: $9.2
      12-month EPS: $1.96
      Profit margin: 4.1%
      Market Cap: $698.4 million

      Balance Sheet*
      Cash: $12.6 million
      Current Assets: $148 million
      Current Liabilities: $28.5 million
      Long-Term Debt: $30.8 million
      (*Pro forma, except for cash; includes
        IPO and Villazon acquisition)

      Ratios
      Price-to-earnings: 74.2
      Price-to-sales: 3.1

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Cigars have been popping up in public places with a perverse regularity that might have left even Freud puzzled. Demi Moore on the cover of Cigar Aficionado. Bill Clinton on the golf course. Supermodels at martini clubs. Unit sales of premium cigars have risen 35% a year over the last three years. Prices have risen even more, leading to a $1.2 billion total retail market in 1996. Investors cued into cigarmania could have found Culbro.

The asset shuffle and the General Cigar IPO meant that Culbro's board thought the company was undervalued. The next step was calculating the break-up value. Strong earnings only added to the story.

WHERE TO FROM HERE?

Culbro's valuation is almost completely dependent on its 20.1 million share stake in General Cigar Corp. Including the new Villazon operations, that company would have made $0.70 a share last year on $197 million in revenue. For the year ending in November, analysts expect General Cigar to make $1.05 per share, with $1.43 per share for FY98. That's 43% annual growth over the two-year period. General Cigar now trades at about 29 times FY97 numbers and 21 times FY98 results six quarters away -- about right if the company can sustain 25% to 30% growth.

No doubt the cigar craze will someday go up in smoke, but the sheer dynamics of strong demand and a tight supply of quality aged tobacco are currently keeping premium cigar prices high. The new cachet associated with cigar smoking is spilling over into the pricing of mass-market cigars. As long as the good times roll, General Cigar should continue to fire up investors.

With that company trading at $30 a share, Culbro's holding is now worth $603 million. Arbitrageurs and investment bankers can sweat the details, but balancing out cash, debt, and the assets that will be spun off, Culbro shares look pretty much fully valued -- as planned. In fact, given that it will be rolled in with its General Cigar spin-off, it's probably safe to say that Culbro will never see another double!

-Louis Corrigan ([email protected])

WE DELIVER - Get The Daily Double delivered
straight to your e-mailbox every evening!