Ust Inc Business Risks

In: Business and Management

Submitted By margoaway
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What are the primary business risks associated with UST inc.? What are the attributes of UST Inc.? Evaluate from the viewpoint of a bondholder.
.

UST Inc. is a long standing market leader in producing moist smokeless tobacco products. They were a key innovator in the market and have a long standing trusted and recognised brand name. They are known for their conservative debt policy and high dividend payouts.
UST has maintained an A-1 credit rating, the highest rating for commercial papers.
They have been name as one of the most profitable companies, beating out icons such as Coca-cola and Microsoft. This is due to their premium products, strong brand name, historical pricing flexibility, the continued growth of moist smokeless tobacco market and the high barriers of entry for competitors.

In 1998, the financial performance of the company is quite profitable. Comparing against the tobacco industry, UST’s gross profit margin, average return on assets, and return of equity are well above the industry medians. looking at their debt capitalization of around 17% compared to the industry median of 65.7%. They have achieved high return rates with low financial leverage,

Over the last ten years, their net sales and gross profit have been at a steady growth due to their premium pricing strategy. They’ve taken an aggressive stance by introducing price increases annually or even bi-annually. But they are getting those results with increasing sales and revenues, which means they’re generating generally positive and stable cash flows.

This pricing strategy does come as a double edged sword. Whilst UST are still a dominant player in this industry, there has been a decline in their market share, with a forecasted 7-year CAGR of -1.6%. This is due to their failure to respond rapidly enough to price-value competitors.

Responding to this, the Red Seal Label was…...

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