Gathering New Information about Stocks, Health, and Sports

         During times of economic uncertainty experienced investors desperately try to find liquid, risk-adverse securities. Related to equities, there is no safer sector than the non-cyclicals. More specific to the tobacco industry, the addicting but profitable drug is an excellent asset to have during unstable markets. During this time, any of these companies will perform to shareholder liking and engender a greater possibility of capital gains than most other companies. While companies like Altria and Reynolds America are both recognizable and respected names in this industry, another company Carolina Group (CG), has an even greater possibility to perform much better in the distant future. Carolina Group encompasses a wonderful business model with strong fundamentals that will benefit all investors of this company.

         With respect to the business plan, Carolina Group addresses its model, according to Reuters by engaging "in the production and sale of cigarettes." As a group of Loews Corporation and producing through its subsidiary of Lorillard, the company sends out "brand names of Newport, Kent, True, Maverick and Old Gold." As Newport is the company's most famous brand, because nearly 92% Carolina Group's revenue comes from this area, the company highly focuses on this type of cigarette. Unable to sell its product directly to the consumer, Carolina Group uses a standard service model of sending its product to distributors who then resend the goods to the appropriate retailers.

         While Carolina Group does not sell its products outside the extended United States, sales have not reflected this limited exposure. Over the past twelve months, Carolina Group has seen revenue near $3.87 billion which is more than its closest industry and market-cap competitor UST. This number is also third highest in the tobacco industry, disregarding American Depository Receipts. As a very broad generalization, Carolina Group's share price has reaped some of the rewards of a large revenue figure. Year to date, the company's stock is up more than 10%--a great number considering the economic turmoil which recently arose. In addition, the share price grew almost 45% in 2006 and has not had a negative calendar year since 2002�the year of its IPO and the year of the free fall in all broader markets. Continued appreciation may not continue to support such encouraging advances, but a strong precedent has been rendered, acknowledging the fact that many investors have favored Carolina Group quite highly.

         Nevertheless, fundamental analysis is a great way to confirm this advocate. With a $3.87 billion dollar sales line, this number is not quite satisfactory unless it is somewhat higher than in years prior. Interestingly enough, according to statistics provided by Reuters, sales have expanded at 6.65% from this time last year. While the number is a bit below the industry's level at 6.83%, there are two ideas to keep in mind. First, Carolina amasses a lot of revenue compared to its competitors. Increasing sales margins will be continuously harder to find when revenue numbers are already high. In addition, Carolina had a five year sales growth rate of negative 0.46% before last year, and an upstart into positive territory is great news for this firm. This number is also above competitors UST, Reynolds American, and Universal Corp: each posting negative or below industry numbers.

         Moving to other growth areas, even though Carolina Group has a relatively large sales number, margins over the past few years have been exceptional. Gross margins of 42.10% and operating margins of 33.39% over the past twelve months were both above industry averages of 33.78% and 20.48% respectively. Moreover, Carolina Group has seen margins increase last year from the company's five year respective averages of 41.99% and 27.72%. Gross margins for the industry actually fell 7% during the same time period. Compared to other industry competitors, UST has also seen decreasing gross margins, and Universal only produced gross margins of 22.07% and operating margins of 9.28% last year, despite having a low revenue figure of $2.00 billion.

         Continuing to the bottom line, costs were under control this past year for Carolina Group as EPS grew at 19.11% from last year�a figure nearly four times the industry average. This figure was also above competitor's UST and Reynolds numbers as well. Nevertheless, what is a bit disappointing about Carolina is its negative growth rate on capital expenditures. However, cigarettes, as an inelastic good, do not need too much R&D or alterations compared to other industries. This is a situation justified with a low CAPEX growth rate for the industry as a whole anyway. Thus, with the given information, there is some convincing evidence that Carolina is growing quite nicely and should continue to do so.

         Given the growth prospects for Carolina, some investors may speculate that this company is overvalued. However, statistics from Reuters show that the industry P/E ratio is 15.90. Trailing numbers for Carolina show a 15.12 multiple, while 2007 estimates a ratio even lower at 14.57. While the difference may not be that tremendous, the valuation of Carolina is quite low compared to some of the industry competitors. UST has a multiple of 15.35 for the same time period, and Reynolds has a multiple almost identical to that of Carolina's. In addition, Carolina's forward price to sales ratio of 2.04 is also below the forward multiple of Reynolds (2.10) and UST (4.34), not to mention below the industry's figure of 2.13 as well. Now combining both the valuation and growth prospects of this company to the PEG ratio, based on a five year growth pattern, and the result is a 1.82 multiple for this company. While this number may be a bit high to the general investor, relative to the tobacco industry, this number is actually quite low compared to UST's 2.18 or Universal's 2.49 PEG�making a Carolina a great purchase for any portfolio.

         Furthermore, there are many less obvious reasons to invest in Carolina. CEO Martin L. Orlowsky and his 3100 employees are making good use of investor equity, as ROE over the past year has reached 278.38% which not only obliterates the industry's average of 28.16%, but handily overbears Reynolds's 16.15% figure and Universal's 12.19% number. ROA and ROI of 29.76% are both greater than the industry as well. The company has a good amount of free cash given its low price to free cash flow ratio of 19.56 compared to the industry average at 63.93 and uses much of this abundant amount to help investors by the form of dividend payouts. Providing a 2.49% yield for investors is an enticing feature and buybacks may also be on the horizon because capital expenditures have fell. In terms of efficiency, receivable turnover at 167 is way above the industry average at 22.27 and asset turnover is also strong at 1.43 compared to 0.86. Therefore, given this information, there is a wealth of reasons to at least consider purchasing shares of Carolina Group.

         A strong business model and good fundamentals are essential for any company to thrive in the stock market. Fortunately, Carolina Group has both these assets. And now would be a great time to make use of these benefits. Technical indicators illustrate a low stochastic reading and Carolina's share price is dancing around a low support level of 72. The short ratio of 7.6 is a bit high�meaning more covering may need to happen, and since 95% of the stock is owned by institutions, there is some warrant to the high share price appreciation the company has seen through its public lifetime. Provided with these pieces of information, investors, wary of current economic conditions, should take some refuge into safer assets or at least safer equities. And Carolina Group will absolutely fulfill the role of the latter suggestion.

-Dennis Biray
August 24th, 2007