The Vector Group (VGR) is currently a selection of GuruFocus’ Historical Low P/S Companies Screener. Despite a rising share price, VGR’s P/S ratio has fallen to near 10-year lows.
This compression in valuation has also come during a time of rising revenues.
The business
VGR operates in the tobacco, ecigarette and real estate markets through their ownership of Liggett Group, Vector Tobacco, Zoom E-Cigs LLC, and New Valley. New Valley owns a 70% interest in Douglas Elliman.
- Tobacco: Fourth-largest cigarette manufacturer in the U.S. with a strong family of brands – Pyramid, Grand Prix, Liggett Select, Eve and Eagle 20s – representing 12% share of the discount market.
- Ecigarettes: In 2014, entered ecigarette category with national rollout of Zoom, a disposable product featuring Tobacco and Menthol flavors.
- Real Estate: New Valley, which owns 70.59% of Douglas Elliman Realty, LLC, is a diversified real estate company with a portfolio of 20 domestic and international real estate investments. Douglas Elliman Realty is also the largest residential real estate brokerage firm in the New York metropolitan area and the fourth largest in the U.S., with approximately 5,500 agents and 75 offices.
Strategy (from 10-K)
Tobacco
- Capitalize upon our tobacco subsidiaries’ cost advantage in the U.S. cigarette market due to the favorable treatment that they receive under the Master Settlement Agreement (“MSA”);
- Focus marketing and selling efforts on the discount segment, continue to build volume and margin in core discount brands (Eagle 20s, Pyramid, Grand Prix, Liggett Select and Eve) and utilize core brand equity to selectively build distribution;
- Continue product development to provide the best quality products relative to other discount products in the marketplace;
- Increase efficiency by developing and adopting an organizational structure to maximize profit potential;
- Selectively expand the portfolio of private and control label partner brands utilizing a pricing strategy that offers long-term list price stability for customers;
- Identify, develop and launch relevant new tobacco products to the market in the future; and
- Pursue strategic acquisitions of smaller tobacco manufacturers.
Real Estate
- Continue to grow Douglas Elliman Realty’s operations by utilizing its strong brand name recognition and pursuing strategic and financial opportunities;
- Continue to leverage our expertise as direct investors by actively pursuing real estate investments in the United States and abroad which we believe will generate above-market returns;
- Acquire operating companies through mergers, asset purchases, stock acquisitions or other means; and
- Invest our excess funds opportunistically in situations that we believe can maximize stockholder value.
Risks
While there are inherent risks operating in the tobacco business, the most relevant risks in the near term are financial and mostly debt related. From their 10-K:
We have significant liquidity commitments.
During 2015, we have certain liquidity commitments that could require the use of our existing cash resources. As of December 31, 2014, our corporate expenditures (exclusive of Liggett, Vector Tobacco and New Valley) and other potential liquidity requirements over the next 12 months include the following:
- cash interest expense of approximately $95.8 million
- $25.0 million of our 6.75% convertible notes mature in 2015, which were converted into 2,227,553 shares of our common stock in February 2015
- $3.5 million Engle progeny installment payment to be paid in 2015
- dividends on our outstanding common shares of approximately $193.9 million
- other corporate expenses and taxes
In order to meet the above liquidity requirements as well as other liquidity needs in the normal course of business, we will be required to use cash flows from operations and existing cash and cash equivalents. Should these resources be insufficient to meet the upcoming liquidity needs, we may also be required to liquidate investment securities available for sale and other long-term investments, or, if available, draw on Liggett’s credit facility. While there are actions we can take to reduce our liquidity needs, there can be no assurance that such measures will be successful.
Still, the company has usually been able to keep Operating Profit levels above interest expense over the past 10 years.
Dividend
VGR has also paid a consistent 7%+ dividend over the past 10 years alongside a rising share price.
Management
Most of VGR’s management team have been with the company for many decades. Additionally, VGR was named to Forbes 2013 list of most trustworthy companies.
Ownership
According to Yahoo! Finance, insiders own a large stake of the company.
Institutional ownership meanwhile is fairly low compared to other firms its size, possibly indicating a lack of coverage from Wall Street. Peter Lynch preferred companies with lower institutional ownership as it allows for more share mispricing opportunities.
Short interest is ~11% but well within its historic range.
Valuation
On a historical P/S basis, the shares don’t appear very undervalued. There are various things that the company is doing however that don’t necessarily add immediate sales growth but are still accretive to overall shareholder value. The fact that these things aren’t fully factored into the valuation may make the shares cheaper than they first appear.
In 2013, the company increased its ownership of Douglas Elliman Realty from 50% to ~71%. VGR has put an increasing emphasis on growing their Real Estate portfolio. It has numerous non-consolidated investments that do not appear on their financial statements. These include:
Conclusion
While the valuation is too demanding given its previous P/S range, a management team that has been with the company for decades and is well incentivized (owning a large portion of the shares) is usually a good bet. Especially one that has created such large shareholder value over the previous 10 years. Their growing Real Estate interests, many of which go unconsolidated, may provide the next leg of growth.
For more, check out the rest of R. Vanzo’s Articles.
