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In light of school being over and my returning home I instantly noticed that a major part of my daily life has changed. For most people coming home from college starts with readjusting to having to deal with your parents telling you what to do, but for me the first thing that I noticed was that nobody in my family smoked. I personally do not smoke, but at school the vast majority of my friends do. As I began talking to my parents about this strange fact I started to wonder if smoking amongst teenagers and adults was still on the decline. After doing some research I found out that 2005 was the first year since 1997 that the percentage of adults that smoke had not dropped. I then began to wonder if cigarette companies are in the process of making a comeback. After some research, a company that I found that I really like in the cigarette industry is Carolina Group, which trades under the ticker CG.
Carolina Group is the 100% owner of Lorillard which is the manufacturer of the Newport, Kent, True, Maverick, and Old Gold brand of cigarettes. The brand that is most profitable for Lorillard is Newport which is responsible for 92.2% of Lorillard’s sales volume. Newport is the leading cigarette brand in the menthol market. As this cigarette market continues to expand, Lorillard believes that they will continue to be a market leader in this area. The other brand that is starting to help revenues for Lorillard is Maverick, which is a discount brand. It is currently the second largest brand and saw an increase of 20.7% in sales.
Carolina Group is a solid company that I believe will continue to beat expectations as they have done over the past eight quarters. Even as total share count increased by 38.5% the company was able to improve EPS by 25.6% year-over-year. Along with an increase in EPS, revenues also grew by 8.7% to a total of $751.3 million dollars. This was possible even with a decrease in sales volume because of price increases - a classic Economics 101 example of inelastic demand for a good.
As with any company, there are risks that are involved with Carolina Group that include the many legal battles cigarette makers are facing along with the added competition that is entering the menthol market - which Lorillard currently dominates with a 33.6% share. While the increase in competition is something to worry about, this is somewhat offset by the fact that menthol is becoming a larger portion of the overall cigarette sales, increasing to 9.2%.
Overall, while there are risks in Carolina Group, given projected growth numbers and the company’s history of beating estimates I believe a fair price for CG is $85 a share according to a Discounted Cash Flow (DCF) valuation. |
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