A Tobacco Giant Celebrating Over 250 Years in Business
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to focus on a tobacco giant celebrating over 250 years in business: Lorillard Incorporated (NYSE: LO).
- Stable Revenue Growth: In 2007, Lorillard reported revenue of $3.28 billion, in 2011, the company announced revenue of $4.45 billion; representing year over year annual growth of 7.92%, a solid trend that is highly anticipated to continue into the future with projections placing 2014 revenue at $5.05 billion. This growth has been a result of strong product performance and a gain in market share by Lorillard’s main brand, Newport
- Massive Dividend: At the moment the company pays out quarterly dividends of $0.5167, which when annualized puts the dividend as yielding 5.14%
- Relatively Low Valuation: Lorillard currently possesses a price to earnings ratio of 14.45 and a price to sales ratio of 2.42, both of which indicate a company trading with a fairly low valuation
- Addictive Business Model: Lorillard’s main product, cigarettes, are highly addictive and establish solid revenue streams for many years to come
- Institutional Vote of Confidence: 96% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
- Double Digit Net Profit Margin: Currently, Lorillard carries a net profit margin of 25.00%, which represents a strong and profitable company primed for growth
- Unhealthy & Expensive Offerings: Cigarettes and the other tobacco products Lorillard offers are extremely unhealthy for the user and can prove to be an expensive endeavor for the tobacco product consumer, which are two disadvantageous factors in any products
- Lack of Book Value: At the moment Lorillard possesses -$3.99 per share of book value, a troubling sign, but this metric is only of small consideration as the company’s sales compensate for the lack of book value
- Net Debt: Despite possessing $1.71 billion of cash and cash equivalents on their balance sheets, the company’s debt load of $3.12 billion results in a rather sizable net debt, which accounts for 9.03% of Lorillard’s total market capitalization
- Gaining Market Share: Lorillard’s main cigarette brand, Newport, has climbed in market share from 9.7% in 2008 to 11.9% in 2011, and further growth in market share could provide substantial opportunity for the company
- Smokeless Products Market: The United States smokeless products market is rapidly expanding, developing from $1.18 billion in 2009 to $1.38 billion currently, and further growth in this market could provide opportunities for the company
- Product Innovation: Any new and innovative offerings from Lorillard could fuel sales growth and capture customers
- Dividend Growth: Since implementing their dividend program in 2008, Lorillard has consistently raised their dividend payouts, a trend that is anticipated to continue into the future
- Competition: The tobacco industry is extremely competitive, and the fierce battle to offer the best product for the least amount of money can lead to margin compression
- Lack of International Exposure: The company operates strictly in the United States, with no international exposure, and any economic downfalls that are exclusive to the United States could cripple Lorillard--more so than other companies that have global diversification
- Stagnant Economic Landscape: Tobacco products are relatively expensive, with hefty taxes placed on them, and in a stagnant economic landscapes, consumers are less willing to pour hundreds of dollars into tobacco products
- Decay in United States Cigarette Market: The United States cigarette market is rapidly diminishing, with 333 billion cigarettes sold in 2008 shrinking to only 265 billion currently, and further decay could pose serious problems to core business
Major publicly traded competitors of Lorillard include Reynolds American Incorporated (NYSE: RAI), Altria Group Incorporated (NYSE: MO), Philip Morris International Incorporated (NYSE: PM), and Vector Group Limited (NYSE: VGR). All of these companies, with the exception of Philip Morris, operate in the United States tobacco industry and compete directly with Lorillard. Philip Morris operates internationally across the world in the tobacco industry. Reynolds American is valued at $24.76 billion, pays out a dividend yielding 5.33%, and carries a price to earnings ratio of 16.77. Altria is valued at $70.25 billion, pays out a dividend yielding 5.07%, and carries a price to earnings ratio of 16.84. Philip Morris is valued at $151.10 billion, pays out a dividend yielding 3.76%, and carries a price to earnings ratio of 17.48. Vector Group is valued at $1.37 billion, pays out a dividend yielding 10.20%, and carries a price to earnings ratio of 62.13.
The Foolish Bottom Line:
Financially, Lorillard is as solid as a rock. The company possesses stable revenue growth that should continue into the future, a business model producing a double digit net profit margin, and a relatively low valuation. While the company possesses a debt load, this minor fault in the business is compensated through the company’s massive and growing dividend. However, the company is located in an industry which is destined to die out in America. The industry has seen substantial decay over the past years and should continue to diminish into the future, but the industry will sustain in the United States for decades, possibly for centuries to come. All in all, Lorillard is a tremendous investment that should provide investors with solid returns well into the future.
makinmoney2424 has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!