More restaurants may be calling themselves "cigar friendly," but, for the past 10 months, Wall Street has been kicking the butts of publicly traded cigar companies, thanks to a glut of cigars that has driven down retail prices and sent earnings up in smoke.
Is the fire gone from the cigar phenomenon? Hardly, analysts say, but company stocks will smolder until sometime next year, at least.
"An inventory imbalance was caused by a lot of new entrants," said Wheat First Union analyst Ralph Jean. "They got shelf space because the big players - primarily Consolidated and General Cigar - were capacity-constrained. It created a classic oversupply phenomenon."
Premium cigar imports nearly quadrupled from 132 million stogies in 1994 to more than 515 million in 1997. The biggest problem, Jean said, was a flood of less-expensive cigars from a crowd of small, private companies.
Consolidated Cigar Holdings, the largest pure cigar play, saw its second-quarter sales drop to $69.1 million vs. $76.4 million a year earlier; net income dropped to $10.5 million vs. $13.2 million as price pressures ground margins down to 26 percent from 30 percent. Its stock has fallen from its all-time high of 33 1/4 on Oct. 14, 1997, to 9 1/16 on Wednesday.
The No. 2 company, Swisher International Group, showed second-quarter sales were stagnant at $70.2 million vs. $70.7 million a year earlier, with net income dropping to $8.8 million from $10.5 million. Its stock has fallen from its all-time high of 20 7/8 on Oct. 14 to 6 3/16 Wednesday.
General Cigar, third in the market, had a better second quarter, with sales increasing 16 percent to $68.2 million but said earlier this month that third-quarter earnings won't meet analysts' estimates, coming in around 15 to 20 cents a share instead of the expected 27 cents. It also said fiscal 1998 won't look as good as the prior year. The stock has fallen from its all-time high of 44 3/16 on Oct. 20 to 7 5/16.
But the market has really kicked Caribbean Cigar's ash. Its stock tanked from a high of 12 3/4 on Feb. 18 to just 28 cents this week. Last year, the company lost $7.7 million on sales of $5.8 million and is fighting to avoid being delisted from the Nasdaq Small Caps.
There are few "buy" recommendations, but the single exception on Jean's list is North Carolina catalog retailer 800-JR Cigar, Inc. which did $240 million in 1997 and showed a second-quarter increase in revenue to $70 million over $60.4 million a year ago.
"They're the leading liquidator in the cigar business," said Jean. The company's sales materials show them selling for $24.99 a box that went for $140 last year.
But even though sales are up, the drop in prices has pushed JR's net income to $3.9 million for the second quarter from $6.6 million. The slide, in turn, sent JRJR stock down to 12 3/4 from its historic high of 38 3/16 on Oct. 6, 1997.
Both Jean and David Adelman, tobacco analyst for Morgan Staley, Dean Witter expect the glut to last for at least another six to nine months. "They'll be showing a lot better performance this time next year," Adelman.
Both say that future growth is likely to be far more moderate than in the past. Both analysts said that the popularization of cigars - humidors are now found in convenience and grocery stores - has only helped.
"It's an affordable luxury - you could say a fantasy - product," noted Jean, and that "means that some guy who makes $20K per year can smoke the same cigar as Donald Trump."
Written By Lewis Purdue, CBS MarketWatch