Stock Preacher

Alliance One International Inc. (NYSE: AOI)

Alliance One International Inc. is a global independent leaf tobacco merchant. The Company selects, purchases, processes, stores, packs and ships tobacco grown in more than 45 countries, serving manufacturers of cigarettes and other consumer tobacco products in more than 90 countries around the world. The Company processes tobacco through a mechanized threshing and separating operation and then dries it to meet precise moisture levels in accordance with the customer’s specifications. The processing of leaf tobacco facilitates shipping and prevents spoilage. It offers flue-cured, burley and oriental tobaccos. AOI also provides processing and related services to manufacturers of tobacco products.

AOI holds a position in tobacco growing regions in the world, including the principal export markets for flue-cured, burley and oriental tobacco. The Company has developed an extensive international network through which it purchases, processes and sells tobacco. AOI sells its processed tobacco primarily to large multinational cigarette manufacturers, including Philip Morris International Inc., Japan Tobacco Inc., Imperial Tobacco Group PLC, China National Tobacco Co., British American Tobacco, Philip Morris USA Inc., Eastern Company S.A.E., R. J. Reynolds Tobacco Company, Lorillard Tobacco Company and others.

Alliance One International Inc. was founded in 1904 and is headquartered in Morrisville, North Carolina.

*year-ending March, 31.
Source: Reuters.com, SEC Filings.

Financial Summary

For the quarter ended June 30, 2009, AOI reported sales of $410.5 million, a decrease of 10.6% from the corresponding quarter in 2008. Sales for the quarter declined due to later southern hemisphere purchasing and processing driven by crop timing, which was partially offset by an increase in average sales prices. Gross profit as a percentage of sales increased 14.7% to $88.0 million in 2009. AOI reported net income of $14.5 million, or $0.16 per basic share, compared to net income of $15.3 million, or $0.17 per basic share, for the prior year quarter.

As of June 30, 2009, the Company had $517.1 million of cash and available credit comprised of $67.6 million of cash and $449.5 million in available credit. AOI’s working capital increased from $620.9 million at March 31, 2009, to $687.1 million at June 30, 2009. Following the quarter end, during July-August, the Company completed the refinancing of its capital structure, which extended debt maturities, permitted early repayments and maintained the appropriate level of committed working capital lines.

Source: Yahoo! Finance, SEC Filings.

The Company stock price increased by 24% from $3.73 on August 18, to $4.63 on September 16 on news that reputable investor Seth Klarman has increased his AOI stake by 43% in the period between March 31 and June 30 of 2009. Klarman’s Baupost Group is now the largest holder of AOI with 10% of the shares.

Analyst Consensus

Analysts polled by Thomson Reuters expect AOI to “Outperform.”

Source: http://markets.ft.com/tearsheets/analysis.asp?s=mtxx

Investment Highlights

The Company process tobacco in more than 50 owned and third-party facilities around the world. It owns or has interests in processing facilities in Argentina, Brazil, India, Tanzania, the United States, Malawi, Thailand, Germany, Indonesia, Macedonia, Bulgaria and Turkey. In addition, AOI entered into contracts, joint ventures and other arrangements for the purchase of tobacco grown in substantially all other countries that produce export-quality flue-cured and burley tobacco, including Canada, China, India and Indonesia.

The Company deals primarily in flue-cured, burley and oriental tobaccos that are used in international brand cigarettes. International brand cigarettes include Virginia cigarettes that contain only flue-cured tobaccos, as well as American blend cigarettes. American blend cigarettes contain approximately 50% flue-cured, 35% burley and 15% oriental tobacco, contain less tar and nicotine and taste milder than locally produced cigarettes containing dark and semi-oriental tobacco historically consumed in certain parts of the world.

In late August, the Company completed the offering of $100 million principal amount of its 10% senior notes due 2016 in a private offering. The notes were priced at 97.5% of the face value, for gross proceeds of $97.5 million and representing a yield to maturity of approximately 10.5%. The notes will form a part of the same series as the Company’s outstanding 10% Senior Notes due 2016 issued on July 2, 2009. The face value of the notes issued in July was $570 million with an interest rate of 10.0%. Thus, the aggregate principal amount of outstanding notes of this series is $670 million. AOI intends to use the net proceeds of the offering of the Senior Notes to fund the purchase price of its existing notes and to repay outstanding borrowings under certain short-term seasonal lines of credit from foreign financing sources.

On June 22, President Obama and the U.S. Congress enacted a new law granting the U.S. Food and Drug Administration (FDA) the authority to regulate tobacco products. Members of Congress and public health organizations have worked for more than a decade to grant the FDA authority to regulate the manufacturing, marketing and sale of tobacco products. The legislation was endorsed by more than 1,000 public health, faith and other organizations across the country. It is also supported by 70% of American voters. Meanwhile, some large tobacco companies jointly filed a lawsuit in Kentucky against the U.S. and the FDA, claiming the law imposes “unprecedented restrictions” on First Amendment Rights. For instance, the law prohibits tobacco companies from jointly marketing their cigarettes with non-tobacco products. Also, they can’t market or describe any products as less harmful than others unless they have approval to do so from the FDA.

Recently, one of the Company’s significant customers, Japan Tobacco Inc., announced its planned acquisition of a leaf processing business in Malawi and a leaf processing business in Brazil, and the formation of a joint venture to acquire tobacco leaf in the U.S. These transactions could have a material adverse effect on AOI’s financial condition and results of operations.

In 2013, the tobacco market is forecast to have a value of $138 billion, with a CAGR of 10% over the 2008-2013 period. China is the leading country among the top emerging nations, with market revenues of $54.9 billion in 2007. Following extensive merger and acquisition activity in the 1990s and 2000s, international markets are dominated by five firms: Philip Morris International, British American Tobacco, Japan Tobacco, Altria and Imperial Tobacco.

Flue cured tobacco remains in tighter global supply, which continues to place upward pressure on green prices paid to farmers and in turn prices paid by AOI’s customers. World supplies of burley tobacco that appeared to be in greater supply at the beginning of this season due to the larger Malawi crop have tightened some as the Malawi crop size estimates have reduced and with lower quality.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

The Company is trading above its 13-day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

The MACD for AOI currently indicates a strong bullish signal for two reasons. First, the MACD is above the signal line, a 9-day moving average. Second, the MACD is above 0, which implies that the underlying moving averages are trending higher.

AOI’s recent volatility has been greater than normal. This is evidenced by the increased distance between the upper and lower Bollinger Bands. These bands measure volatility using standard deviation and a large width is due to high volatility. Additionally, AOI is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

The sole direct competing company in the peer group for AOI is Universal Corp. (UVV). The Company is traded with significant discount to peer P/S and P/E multiples, including to those of UVV.

With the recent financial crisis, AOI has focused its attention on expense reduction, prudent risk management, product development and additional long term debt reduction. In addition, the Company’s balance sheet, which is in good shape with solid liquidity, and its global large and stable customer base, are well positioning AOI to support future growth.

Source: Thomson Reuters; Yahoo! Finance.

Insider Trading Activity

Net Share Purchase Activity

Data provided by Thomson Financial

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