1. What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.? Evaluate from the viewpoint of credit analyst or bondholder.

Attributes and Risk of UST Inc. (1) Strong Name Brand Recognition & Dominant Market Share
UST Inc. is the leading producer of moist smokeless tobacco products with the market share of 77%.
- The company’s management may somehow be pleased with their dominant market share and keenly aware of the company’s strong heritage, and even ignore the entrant of new and smaller competitors, thus decreasing its market share and future earnings.

(2) Insufficient Product Diversification
Smokeless tobacco contributed approximately 88% of UST’s revenues and 97% of operating profit. Wine and other business contributed 10% and 2% of revenues, respectively, and 3% and 0.2% of operating profit, respectively. Also, UST has most market shares on premium products, with only a small portion of price value market share.
- Since health risk of smokeless tobacco remains uncertain, UST with insufficient product diversification may probably suffer a loss if such risk is revealed in the future. Moreover, it is uncertain that the moist smokeless tobacco will still be a growing trend in the future, therefore it is possible that UST cannot compete with other companies with diversified products, losing earnings and failing to generate stable cash flows in the future if it just has only a few product lines. (3) Insufficient Geographic Diversification
While cigarette companies tackle declining domestic consumption trends with offshore growth, UST has no immediate opportunities for international expansion.
- UST cannot transfer its regional violation and risk of earnings to international market, thus making its future cash flow uncertain. (4) Strong Financial Performance
UST is under a stable and great cash flows position with high dividend payout, gross margin, EBITDA, ROE, ROA and Net Margin. (5) Potential Litigation and Lawsuits
UST had seven pending health related lawsuits at the end of 1998. At the same time, UST was also alleged by Conwood Co. for violating antitrust and advertising laws and participating in anti-competitive conduct.
- Potential lawsuits and litigation would probably lead to the bankruptcy. (6) Slow Respond to Competitors
UST was too slow in reacting to the threat of value competitors. When UST introduced its new products, the value segment had already gained a market share of 9%, forcing Red Seal to