Ust Case

UST Inc. and the Industry

The U.S. moist smokeless tobacco market generates $2 billion of retail revenue in 1998. UST Inc. is the leading smokeless tobacco producing company that controls approximately 77% of the moist smokeless tobacco market. This company has a history of generating high profits and maintaining steady growth due to its dominant market position, innovation, and strong brand names. UST Inc. is able to generate high very returns on capital (92.1%-5yr) compare to other American firms, with large gross profit margin of 80% compare very favourably to the industry median of 28%. These positive attributes speaks highly of UST Inc. In the point of view of a bondholder, such profitable company should have the ability to meet the long term debt obligation i.e. the newly issued corporate bond.

However, there are many other things that bondholder should consider before buying into the UST Inc.’s newly issued 1 billion dollar corporate bond. The primary business risks associated with UST Inc. are similar to typical tobacco industry, such risks the bondholder should consider includes: 1) Litigation and legislation, as this can cause potential default on company’s financial. If any large sums of legal settlement on future occurred, the firm would have difficulty to repay the corporate bond. 2) Market and advertising restrictions and 3) Taxes both decreases the net income, other income generating ability, and affects cash on hands and therefore affects UST’s ability to make coupon payment to the bondholders. 4) The declining volume of the industry indicates that the company’s long term revenue generating ability would also decline over time, thus affects the firm’s long term repayment ability on the corporate bond.

The above is associated with the industry; UST Inc. also has risks that are associated with its current market position. UST Inc. is currently losing significant market shares due to the recent reduction in innovation and snow reaction in...