Started By: Alex SvS
Date: Jun 8 1999 3:58PM ET
Dear BFN readers,
The following research report was written by me, Alex von Streeruwitz. I am a partner and
small cap analyst at BFN bizfn.com. I've led our research efforts at Small Cap
Forum smallcapforum.com (a BFN site) on LCSG and several other internet stocks
we have presented on some of our other sites.
I have bought shares as I've disclosed in the report, but I have not been otherwise compensated,
nor has Business Financial Network.
If you have specific questions or comments, PM me or standard email me 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(LCSG). 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, 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 (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.
The Ultimate Cigar Company
(Soon to be renamed UltimateDirect.com)
Symbol: ULTC otc bb
Recent $.75 (6/7/99)
Bid/Ask: $.70 - $.75
Shares Issued and Outstanding: 8,139,053
www.ultimatecigarcompany.com
Phil Cote, President (604) 687-0300; Fax: (604) 687-0151
Company Introduction
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-Eleven®,
Circle K®, and Mobil® 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.
WEB ACCESS CARD PROGRAM
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.
SUMMARY:
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:
This material is for personal use only. The content provided within this report is provided for
informational purposes only, and should not be construed as investment advice. At no such time
should information contained herein be considered an offer to buy or sell securities. This
analysis is based on publicly-available information, and is in no way warranted by Business
Financial Network or Alex von Streeruwitz as to accuracy or completeness. I do not guarantee
to advise you as to any change in this information. Alex von Streeruwitz and/or Business
Financial Network owners, editors, management, and contributors may currently be
stockholders in this Company as the result of purchasing its stock on the open market. We may
from time to time purchase or sell this Company's securities on the open market. Neither Alex
von Streeruwitz nor Business Financial Network was compensated by the company for issuing
or distributing this report. Most Importantly, Do your own due diligence before investing. |
