Universal Corporation Stock: Steady As She Goes (NYSE:UVV)

Universal Corporation (NYSE:UVV), which processes and supplies leaf tobacco and plant-based ingredients around the world, reported a good fiscal second quarter in light of supply constraints and some inflationary pressure.

Demand for tobacco remains high, and a positive for the company now and in the near-term future is the easing of shipping constraints in a number of important markets, including Brazil.

With tobacco shipments weighted to the second half of the company’s fiscal year, it should result in the company shrinking its debt level as customers send the company their payments.

So, with strong tobacco demand, a pathway to reducing interest payments on its debt, and shipping constraints being alleviated in some of its markets, UVV is well positioned to continue to perform well, with more than enough earnings to pay its dividend while generating incremental growth.

In this article we’ll look at some of the recent earnings numbers and what investors can expect from the company going forward.

Some of the recent numbers

Revenue in the fiscal second quarter of 2023 was $651 million, up almost $200 million from the $454 million in revenue generated in the second fiscal quarter of 2022.

For the first six months of fiscal 2023 the company generated $1 billion in revenue, just under $200 million from the $804 million in revenue generated in the first six months of fiscal 2022. That means almost all the increase in revenue came in the second fiscal quarter, partially from higher tobacco sales volumes and prices, as well as an acquisition in the reporting period.

In its tobacco segment the results were higher from a hefty shipment of current and carryover tobacco. Included in tobacco sales was some tobacco with lower margins.

I believe with an improving shipping environment and the company cutting its debt load, it should result in improved margins and earnings in the quarters ahead. Net income in the second fiscal quarter of 2023 was $21.9 million or $0.88 per share, up from the $19.5 million or $0.78 per share from the second fiscal quarter of 2022.

Adjusted operating income in the quarter was $37.9 million, up $8.9 million from the $29 million in operating income produced last year in the same quarter.

Cash and cash equivalents were $59 million, with long-term debt of $519 million.

Ingredients Operations

In its smaller Ingredients Operations segment it has been growing at a decent pace, with operating income coming in at $4.5 million in the reporting period, up from the $2.7 million in the second fiscal quarter of 2022.

In the first six months of its 2023 fiscal year operating income in Ingredients Operations was $9.1 million, compared to $7.1 million in operating income in the first six months of fiscal 2022.

A major part of the improvement came from the acquisition of Shank’s Extracts, LLC in October 2021.

Demand in human and pet food categories is the major growth catalyst in the segment.

Margins in Ingredients Operations, even with higher input and inflation costs, remained strong when measured against the first half of fiscal 2022.

Performance by geography

Brazil was the major contributor to revenue in its Tobacco Operations segment, as shipments were up significantly in the quarter as shipping constraints shrunk.

It appears that improvement in shipping to Brazil should hold in the quarters ahead. If so, when some of the other challenges are solved, it will probably result in some higher performing quarters over the next year or two.

On the other hand, crop shipments from Africa were down in the first six months of fiscal 2023, with shipments from Mozambique and Malawi dropping as a result of smaller crop sizes and logistical delays.

In the North American market sales were down from unfavorable product mix, which included low-margin tobacco in the first half, along with the timing of shipping, which should work itself out in the near term.

Business in Asia improved in the first half of fiscal 2023 as measured against the first half of fiscal 2022. If the company can sustainably secure more supply, I think it could be a good growth market of UVV.

Conclusion

When looking at a 5-year or 10-year chart of UVV, it’s obvious that the company has been performing at a similar level as measured by its stock price during that period of time. It has moved from a bottom of approximately $40.00 per share to about $64.00 per share.

It has moved higher a couple of times over the last ten years for a relatively short period, but it has never held. For that reason, and because it has hit $64.00 several times as a ceiling and pulled back from there, I think that’s the best way to look at the top, rather than a couple of short periods of time when it exceeded it.

Based upon the performance of the company over that time, I think the best way to play it is to drop after a period of an increase in its share price and take a position then.

Looking at the charts, I see the best entry point as being $50.00 per share or lower. Once the company surpasses that mark it tends to trade higher for a prolonged period of time before correcting. For those that buy over $50.00 per share, the upside is limited, and its dividend yield isn’t as attractive.

Once the stock starts moving down, using dollar-cost averaging is probably the best strategy to use in acquiring shares, as it tends to continue to move down once the process begins; it usually isn’t a quick bounce where the stock starts to climb again.

Getting in at a good entry point and riding the stock for income is what UVV offers investors. If it breaks above the $55.00 or higher, I suggest taking profits and wait for it to come back down and start building another position.

The price movement of UVV is very predictable as the charts show and being patient for an entry point is almost as close to a guarantee you can get to generating income while waiting for the share price to climb.

Last, if getting in at a good price, another option would be to ride it for income while waiting for another dip to add to your position in order to generate even more income while saving capital gains taxes, if you’re subject to them.