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SMALL CAP FORUM NEWSLETTER
smallcapforum.com
June 8, 1999
A Business Financial Network Publication
bizfn.com
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Dear Small Cap Forum readers,
The following research report is brought to you by Alex von Streeruwitz, a partner and small cap analyst at BFN. He has led our research efforts on LCSG and several other internet stocks we have presented. If you have specific questions or comments, e-mail him at alexsvs@erols.com
When looking for internet businesses that offer great investment potential, we have often tried to find companies with a core growth business that is itself a value stock, coupled with a new or evolving subsidiary that is an internet play. We've also focused on the pure internet plays which are a somewhat more leveraged bet (more upside potential but riskier), but the multiple business approach offers some sector diversification within one security.
The latest stock I'd like to tell you about was introduced to me by the same individual who suggested we look into LCS Golf (OTC BB: LCSG)- A stock many Small Cap Forum readers are familiar with. We get these kinds of suggestions all the time from multiple sources and after our due diligence, we decide that some of them merit our reader's attention. When one source was so right on one pick (a fat 600% gain in 6 months), it keeps our attention the next time that source says, "You should check out..." Well, I've done my due diligence on the Company, and I think it's a great one.
The company, The Ultimate Cigar Company (OTC BB: ULTC) (Soon to be renamed UltimateDirect.com) recently acquired massive distribution channels for its cigar business which by itself sells at only 1X sales with good margins. More importantly, the company has acquired exclusive US distribution rights for Web Access Card, potentially one of the most important e-marketing developments since the banner ad. It combines the principles of prepaid phone cards with e-commerce... A powerful combination. This report begins with a description of the core business and then discusses the ingenious internet play the company offers.
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The Ultimate Cigar Company
(Soon to be renamed UltimateDirect.com)
Symbol: OTC BB: ULTC
Recent: $.81 (6/8/99)
Bid/Ask: $.81 - $.85
Shares Issued and Outstanding: 8,139,053
ultimatecigarcompany.com
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Contact: Phil Cote, President (604) 687-0300; Fax: (604) 687-0151 --------------------
COMPANY INTRODUCTION
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The Ultimate Cigar Company is a publicly traded company that imports, distributes and markets cigars. Their focus is the convenience and grocery trade, selling its brands through well-known distributors such 7-Eleven, Esso, Chevron, and Petro-Canada.
The company is by no means targeted at what might be looked at as the lower/lowest end of the market. The Company also sells to the lucrative tobacco retailer market. The company's founding mission was to introduce a high quality premium cigar called "The Ultimate" into the retail tobacco market. Essentially, their broad distribution brings premium cigars to the consumer where they are, rather than concentrating on the mom and pop tobacco & cigar shops. The cigars distributed and marketed by Ultimate are high quality, receiving a rating of "highly recommended" in the Spring 1997 issue of Smoke Magazine, but the company's cigars are available to a mass market.
Americans smoked 3.5 billion cigars last year, more than any other nationality except Chinese. There are approximately six million cigar smokers in the U.S., of which, approximately one million are premium cigar smokers. The corporate goal is to be recognized as a premier source of competitively priced, high-quality, mass-market cigars in North America within three years. Marketing will focus on wholesale distribution to traditional convenience and grocery stores, tobacco retailers and direct-to-consumer sales through cigar clubs.
Strengths of the Company
1) Quality and Price. The company offers a strong balance of quality and price. The Ultimate Cigar Company has created a comprehensive line of fine quality cigars to serve the cigar smoking markets. The Ultimate Cigar Line features all hand-made and hand-rolled cigars, all natural tobaccos and premium blends. The tobaccos come from the Dominican Republic, the Caribbean, Nicaragua and Honduras. Its cigars are priced at affordable retail pricing but consist of excellent tobacco blends and consistent construction. Few companies offer such quality cigars at retail prices under $3.
2) Marketing Support. Ultimate understands its not enough to just supply cigars. We are very concerned about the merchandising and promotion of the product. We offer cigars in four distinct packaging schemes: a) Bundles b) Boxes c) Shelf Packs d) Humidipack. The different packaging creates opportunities for cigar sales in a variety of markets.
3) Consistent Supply. Ultimate has tremendous reserves of cigars and tobacco through its manufacturer network. Cigar availability fluctuates wildly with the market. Ultimate works to guarantee there is never an out-of-stock situation.
State of the Industry
Cigar consumption is expected to continue to expand because of the new channels of distribution. The new channels are Mass Market Retailers such as grocery and convenience, Mail Order, Internet Sales, Cigar Club Sales, Vending Machines. Companies that are growing in the cigar industry are marketing oriented companies that effectively reach the end consumer. Ultimate's strategy of reaching the end consumer, capturing purchases by event-related and infrequent purchasers is a very solid one. Convenience and Grocery could account for as much as 25% of total cigar industry sales in 1999. Cigars sales are generally accelerated through special events. Impulse buying from customers in convenience and grocery stores suits the special event orientation of cigars. Just as Champagne sales should rise significantly due to the millennium New Year, so should cigar sales.
Great Infrastructure of Distribution
On May 25, 1999, Ultimate Cigar Company purchased Can-Am International Investment Corporation, Canada's largest humidor cigar company. Can-Am is a supplier of humidor cigar programs to over 3,100 accounts in Canada, including 7-Eleven, Esso, Chevron, Petro-Canada, Mohawk, Husky, and Mac's Convenience stores. The purchase followed a strategic partnership developed in February. Commenting on the acquisition, Phil Cote, President of Ultimate, said the synergy between the companies was the reason for the purchase. ''Ultimate feels it has the best product and supply agreement in the industry. Can-Am has a large distribution network and has created tremendous inroads into the Canadian marketplace. We felt merging the strengths of the companies would make us more competitive.''
As part of the purchase agreement, Ultimate has the opportunity to pursue an alliance with Premium Cigars for distribution of Ultimate's Island Collection Cigar Program. Premium Cigars has distribution of over 6,500 convenience store accounts in the United States. Premium Cigars currently sells its products in nearly all major c-store chains, including 7-ElevenÆ, Circle KÆ, and MobilÆ throughout the United States and Canada.
With the purchase of Can-Am and Ultimate's distribution in the United States, projected sales for 1999 are $US 6.8 million. That put the company at roughly 1X this year's sales with great growth prospects over the next few years as the new distribution is fully utilized. The partnership involves the sale of all of the stock of Canam International Investment Corporation, a wholly-owned subsidiary of PCIG to ULTC for a combination of cash, and an exchange of PCIG and ULTC stock between the two companies. Included in the transaction, and subject to shareholder approval, ULTC has obtained an option to purchase up to a 50% equity position in PCIG for an additional investment of US $2,500,000. As we will elaborate on in more detail in this report and follow up reports, ULTC now has an option to purchase half of one of the best e-marketing concepts since the banner ad and holds exclusive rights for the USA.
Another key marketing relationship is with Syracuse Merchandisers of Syracuse, New York. Syracuse Merchandisers is the Company's Master Broker for the United States. The Broker's goal for 1999 is to sell 3,000 stores in the North East region of the United States.
The Humidipack - An Innovative Distribution and Marketing Tool
The Humidipack is a counter top merchandising program designed to improve the merchandising and selling of premium cigars. Cigars are packaged in a throw-away plastic container. Each container holds a humidification tube to guarantee proper freshness and humidification of the cigars. Premium cigars require humidification for proper "smokability." The Humidipack is a self-contained humidified unit.
The Humidipack is a premium program. Cigar prices can go above $7 or $8. The Humidipack is attractive and professional and has the "look" of a premium cigar display. The containers sit on the front counter of a convenience store or the service counter of a grocery store. The front counter is the best place to sell cigars. The Humidipack takes up very little room when compared with the profit it can generate. The placement of the display also facilitates impulse and event-driven sales.
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WEB ACCESS CARD PROGRAM
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On June 4, ProductExpress.com, a division of PCIG(Premium cigars International), signed an exclusive agreement with ULTC to sell and distribute ULTC's new Web Access Card program throughout the USA. Web Access Cards is a direct marketing program with projected distribution through convenience stores. Consumers shopping at convenience stores will have the opportunity to buy Web Access Cards to take advantage of special offers and discounts from well-known Internet companies.
Web Access Cards are purchased by convenience store customers. Each card has a personal identification number. The customer has to go online to ULTC's Web site, Red Hot Connect.com, to register. Once the proper information is completed, the purchaser is hyperlinked to the participating Internet Company's Web site for fulfillment of the offer.
The Web Access Card program is innovative for the convenience store industry and is a unique marketing concept for Internet-based e-commerce companies. PCIG and ULTC believe that the Web Access Card program is similar to prepaid phone cards in a convenience store marketing and sales capability. According to the 1998 Industry Report Online from Convenience Store News, phone card programs represented 22.71% of in-store convenience store sales in 1997 and accounted for $638 million of the overall convenience store industry sales.
Commenting on the deal, Scott Lambrecht, President and CEO of PGIC stated, "Based on the combination of PCIG's convenience store industry knowledge, nationwide distribution base of over 10,000 retail outlets, the overall success of phone card programs in convenience stores, and the ongoing success of e-commerce on the Internet, ULTC's Web Access Card program represents an exciting new growth opportunity for PCIG, ULTC, and our retail outlet customers. We believe the Web Access Card program will be well received by the convenience store industry. It has a strong possibility of attracting internet users to convenience stores who will want to take advantage of the Web Access Card's Internet offers and discounts which can help expedite the expansion of ProductExpress.com's nationwide convenience store distribution base''.
''Web Access Cards are going to be terrific for Internet companies. Convenience stores are a perfect location to reach millions of potential users for online services,'' said Mark Jensen, the Marketing Director of ULTC. ''Internet companies have created a new business model where more dollars are being spent on advertising instead of into hard asset facilities. Web upstarts are more frequently pouring millions of dollars into television, radio, and print advertising to build their brands off-line as well as online. We believe most of this spending is not providing measurable results. Our program could provide measurable and accountable results in new customers and revenues. The Web Access Card is a true link between real world advertising and cyberspace. It gives Internet companies the opportunity to increase their online customer base at a reasonable cost per new customer acquisition.''
The PCIG Board of Directors has approved the name change of Premium Cigars International Ltd. to ProductExpress.com subject to anticipated upcoming shareholder approval. In addition, ULTC has recently announced that they will change their name from Ultimate Cigar Company to UltimateDirect.com.
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SUMMARY
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This is certainly not a politically correct choice, but I believe it will certainly be a profitable one. I have bought shares recently between $.74 and $.84. The cigar business is only trading at 1X sales and cigar stocks in general have been out of favor for more than a year. I think the cigar business is worth 2-3X sales, possibly higher if the industry catches investor's attention again soon. The Web Access Card business is frankly an open ended equation. Putting a number on the potential is nearly impossible, but recognizing the upside potential is quite easy. If that company had a publicly traded stock individually, I would feel quite comfortable buying in at a $25 million market cap, just for the ingenious idea alone. That would translate to $3/share just for the Web Access Cards. Coupled with the cigar business, a $5 stock 12-24 months out looks very "reachable."
Disclaimer
©Copyright 1999, Business Financial Network, Inc. All rights reserved.
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The opinions and analysis included herein are based on sources believed to be reliable and in good faith but no representation or warranty, expressed or implied, is made as to their accuracy, completeness or correctness. This information is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. The foregoing discussion contains forward-looking statements which are based on current expectations and differences can be expected.
Readers are urged to consult with independent financial advisors with respect to an investment in the shares mentioned herein. Investors should review a complete information package on the Company, which should include, but not be limited to, the Company's annual report, quarterly report, press releases, as well as all regulatory filings. All information contained in this report should be independently verified with the Company mentioned herein. Any opinions expressed in this report are statements of judgment as of the date of publication and are subject to change without further notice, and may not necessarily be reprinted in future publications or elsewhere. Neither Business Financial Network, Inc. nor its officers, directors, partners or employees / consultants accept liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
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