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Tuesday, March 3,
1998
General Cigar Holdings
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MPP)") else Response.Write("(NYSE: MPP)") end if %>
Phone: 212-448-3800
Price (3/2/98): $17 3/16
HOW DID IT FIND TROUBLE?
General Cigar went public last February at $18 during the peak of the cigar
fad, and its smoking results lifted the stock to an October high of $34.
But these shares have since turned to ash due to worries about slowing sales
and a potential government crackdown on stogies.
As a manufacturer of largely premium cigars selling for more than $1 each,
General Cigar's good times began to unroll after word got around that mail-order
competitor 800-JR CIGAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JRJR)") else Response.Write("(Nasdaq: JRJR)") end if %> was paying bargain prices for
the no-name premiums flooding the market. Since the whole industry had been
fired up by smokers breathing heavy for scarce premium cigars, such news
meant supply might be catching up with demand.
October's stock market mini-crash left Barron's waxing funereal about
how the Dow's demise portended the end to the cigar craze. Some institutional
investors who had helped puff these stocks up also started blowing out the
exits.
Then came fears that the federal government was about to butt in and end
the smokefest. In early February, the Federal Trade Commission (FTC) announced
that it wants to require cigar makers to report their unit sales as well
as the amount they spend on advertising and promotions. The FTC's concern
follows a Centers for Disease Control (CDC) study showing that about 27%
of teenagers smoked a cigar in the last year, with about 4% of boys considered
habitual smokers.
Those numbers could lead the U.S. Surgeon General to require cigar makers
to add stronger warnings to their products. An FTC study found that a premium
cigar has about 12 times more nicotine than a filtered cigarette. Plus, the
National Cancer Institute (NCI) is planning to come out March 15 with an
overview of the health dangers of cigars, which increase the risk of cancer
of the lungs, mouth, larynx and nose. Such actions could force cigar makers
into the ongoing settlement talks between the U.S. government and other tobacco
companies.
BUSINESS DESCRIPTION
A spin-off from the former
Culbro,
General Cigar Holdings is a leading maker of hand-rolled premium cigars,
including Macanudo and Partagas, the two top-selling brands, and Punch and
Hoyo de Monterrey, picked up in its acquisition of Villazon in January 1997.
The company also sells mass-market stogies such as Garcia y Vega, White Owl,
and Tiparillo, but 80% of its sales come from the premiums. It also operates
the Club Macanudo cigar bar in New York City.
The Villazon acquisition cost $81.4 million net of cash, but greatly increased
the firm's capacity by adding facilities in Florida, New Jersey, and the
Honduras to General Cigar's operations in the Dominican Republic and Jamaica.
Pro forma results for FY96 including these operations were $196.7 million
in sales and $32.3 million in operating income.
FINANCIAL FACTS
Income Statement
12-month sales: $262.8 million
12-month income: $36.1 million
12-month EPS: $1.26
Profit Margin: 13.7%
Market Cap: $491.9 million
Balance Sheet
Cash: $9 million
Current Assets: $176.1 million
Current Liabilities: $42.9 million
Long-term Liabilities: $79.8 million
Ratios
Price-to-earnings: 13.6
Price-to-sales: 1.9
HOW COULD YOU HAVE SEEN IT COMING?
With celebrities like Tom Selleck and Demi Moore appearing on the cover of
Cigar Aficionado clutching fat ones, cigars became the latest decadent
pleasure to be revived after years of relative absence from the social scene.
Some might chalk that up to the bull market, but it could also have been
a backlash to the renewed calls to crack down on cigarettes.
Sales of premium cigars heated up for 35% annual growth between 1993 and
1996. The number of large cigars (premiums and mass market) sold in the U.S.
is believed to have soared 17% last year to 3.5 billion. But that figure
was pumped up by an estimated 64% surge in premium sales to 450 million units.
Even so, strong demand met up with insufficient supplies of aged tobacco,
allowing cigar makers to pass along twice-a-year 10% price hikes.
Fads tend to come and go and many investors just figured it was a matter
of time before this one ended and the cigar stocks collapsed. The first sign
of slowing sales, like that announced by General Cigar and top competitor
Consolidated Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIG)") else Response.Write("(NYSE: CIG)") end if %> in their respective fourth quarters,
confirmed fears already wafting through the air. The assault from government
agencies might also have been predicted given the broader battle over tobacco.
WHERE TO FROM HERE?
Despite fears of impending doom, though, it's really not clear that the cigar
craze is fading enough to crush the leading marketers of name-brand cigars.
Some analysts see large cigar sales growth grinding to 9% this year and 6%
next year. But the bulls -- such as General Cigar CEO Edgar J. Cullman, Jr.
-- think that the top premium brands will regain some of the market share
lost to the second- and third-tier brands last year.
Reuters recently reported that Morgan Stanley analyst David Adelman continues
to see General, Consolidated, and Swisher International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWR)") else Response.Write("(NYSE: SWR)") end if %>
poised for five-year annual earnings growth of 25%. And in late January,
Consolidated Cigar affirmed forecasts calling for '98 revenues to rise 23%
to 25%, with earnings up 40%. Nonetheless, Consolidated has been trading
at just 9 times the FY98 estimate of $2.43 per share.
General Cigar is in a similar fix, trading at 10 times the FY98 estimate
of $1.65 a share and 8.3 times the FY99 target of $2.07 a share. Those estimates
assume earnings will rise 31% this year and 28% on average over the next
two years, giving us a PEG of 0.41.
Results for the November quarter showed sales up 59% and gross margins rising
to 52.7% from 42.8% in the fourth quarter of 1996 (without Villazon). That
resulted in operating margins of 27.2% and net margins of 16.8%. For the
year, sales rose 34% over pro forma '96 numbers that include Villazon. Operating
margins also soared, from 16.4% to 22.8%. With those numbers and an enterprise
value to sales ratio of less than two, General Cigar seems cheap if the sales
slowdown and regulatory fallout remain mild.
The media melee sure to follow the NCI report could offer the best opportunity
for bargain hunting. In the meantime, you might want to head to a den of
depravity (i.e., your local cigar bar) to do some channel checking.
-- Louis Corrigan
([email protected])
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