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UST Inc.: One Of The Most Profitable Companies

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UST Inc.: One Of The Most Profitable Companies
Corporate Finance Xudong Huang
Homework Assignment No.1 Xi Huang Oct 23, 2012 Vasudha Nukala Ji Qi

Executive Summary

UST Inc. has historically been one of the most profitable companies. Profitability stems from its commanding market share, strong name brand recognition, historical pricing flexibility, and growing smokeless tobacco demand. However, UST faces business risks including eroding market share, tobacco lawsuits, and reduction in innovation. UST Inc. is considering a leveraged recapitalization to help in shielding the tax, increasing the share price and eliminating idle cash and debt …show more content…
UST observed its operating profit of 96.8% from tobacco and 3% from wine in 1998. With the fast growing of smokeless tobacco segment and less exposure to health related lawsuits, UST’s 77% market share of smokeless tobacco market generates large profit for the company. Other attributes including premium product, strong name brand recognition, historical pricing flexibility, and limited market access by new competitors.

The net sales, gross profit, EBITDA and EBIT have been progressively increasing for the company from 1988 to 1998. However, the sales growth increased from 7.2% in 1988 to 18.8% in 1991, later the sales growth declined to 1.5% in 1998. Net Income has also seen a decline from 23.9% in 1988 to 5.4% in 1998. However, the company has been seeing steady growth of free operating cash flow. It can be concluded that the company is not in any position of financial distress. However, the company’s decision of taking on $1 billion as debt to leverage the company can be an issue for the
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