Vector Group Ltd (NYSE: VGR)

$VGR

Vector operates primarily in two segments: Tobacco and Real Estate

Tobacco: Discount cigarettes with brands including Eagle 20’s, Pyramid, Montego, and partner and private label brands. U.S. only. Altria, British American Tobacco, and ITG brands dominate the market, specifically the higher margin premium segment. Vector only has to pay their excess of its grandfathered market share under the MSA supporting discounted pricing. FY21 tobacco COGS was 57% excise taxes, 22% MSA, 16% manufacturing overhead. ~50% of current volumes exempt from MSA payments.

Vector only produced ~50% of the cigarette volume their facilities are capable of. New FDA requirement beginning in 4/23 will require half of front and back packaging to display a graphic warning to dissuade customers from purchasing. Rule would likely harm Vector as strong brand names would attract loyal customers (e.g. Marlboro and Camel), while deep-discounted brands would continue to attract price-conscious customers. Vector’s Montego strong growth in deep-discount. Minimum pricing laws would also challenge Vector

Real Estate: Real estate investments, as well as a former ownership of Douglas Elliman, spun-off 12/21. Primarily in NY, with the majority of invested dollars in Condos and mixed use developments. Conservative ~$100mm carrying value, higher if sold.

Creditor financed company, with -$850mm of SE. ~2/3 of FCF paid out in dividends

FY21 $1.2Bn tobacco revenues, 37% margins, 20mm real estate revenues primarily operations from an owned facility. Operating cash flow really just tobacco.

~10% ROIC. M&E nearly entirely depreciated, with but with current Capex ~= to depreciation. 20mm capex cap based on ABL. Various joint ventures/VIE’s in RE. More than half of debt are notes due 2029 with 5.75% interest, rest notes with 10.5% interest.

Issues: Generous SERP, same management with Douglas Elliman, and CEO/Chairman also chairman of Nathan’s famous, tough positioning in discount cigarettes segment, cigarettes only, union workforce with unfunded pension obligations, RE investments tough/impossible to fully value, shares outstanding continues to increase, unused production capacity

Pass