UST: UST Guides Up, But Still Falls Short of Expectations

By William Trent, CFA of Stock Market Beat

Mid Cap Watch List and Large Cap Watch List member UST Corp. (UST) reported earnings:

For the first quarter ended March 31, 2007, net sales increased 3.1 percent to $447 million, operating income increased 38.2 percent to $271.4 million, net earnings increased 44.2 percent to $167.1 million and GAAP diluted earnings per share increased 45.1 percent to $1.03 versus the prior year period.

Beyond operations, several factors affected first quarter 2007 results. As previously announced, the Company realized a gain from the sale of its corporate headquarters. This gain was partially offset by restructuring charges related to the implementation of Project Momentum and the resolution of the Wisconsin indirect purchaser antitrust case which the Company settled late last week during court ordered mediation. The Company felt it was in the best interest of shareholders to resolve this matter, which ultimately benefits its adult consumers by providing coupons for future product purchases.

Combined, these three items generated a net gain of $.28 per diluted share. As indicated on the attached table reconciling GAAP to non-GAAP financial measures, first quarter 2007 adjusted non-GAAP diluted earnings per share was $.75, up 4.2 percent versus the year-ago period.

Analysts were expecting the company to earn $0.75 per share on $448 million in sales. The stock was down on the news, which probably makes sense. The company also raised its earnings outlook, but warned of charges that would have an unknown impact on the numbers:

The Company will be returning the net cash generated by the sale of its corporate headquarters to shareholders by increasing the 2007 share repurchase plan from $200 million to $300 million, with the increased purchases taking place in the second half of the year.

As a result of the strength in first quarter 2007 results and the utilization of incremental cash generated from the headquarters sale, the Company is increasing its 2007 adjusted non-GAAP diluted earnings per share target to $3.32, with a range of $3.27 to $3.40. Adjusted non-GAAP diluted earnings per share in the second and third quarter is anticipated to increase over the prior year in the range of 1 to 3 percent, with the balance of the increase coming in the fourth quarter due to the presence of an extra billing day in the Smokeless Tobacco segment.

The Company is focused on adjusted non-GAAP measures because there are two additional opportunities under consideration to strengthen future operations which might require charges that management does not associate with underlying results.

The two “opportunities” are a restructuring charge for layoffs the company expects will reduce future expenses and a possible charge related to resolution of antitrust lawsuits currently in mediation. And even though the company raised its own outlook, the new target still falls below the $3.35 level the consensus was already expecting.
When we reviewed the 10K we called it a “solid company that is not especially cheap.” That type of valuation typically requires exceeding expectations to drive the stock price.

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