The maker of Copenhagen and Skoal is trying to win over customers to its upscale brands. It's also battling rivals to win former cigarette smokers. By Thomas M. Anderson, Contributing Editor January 25, 2007 When people want some chaw, they usually buy a can from UST. The Greenwich, Conn., company is the leading U.S. producer of smokeless tobacco, with roughly three-quarters of the market. That kind of dominance is nothing to spit at, but lately more users have been leaving UST upscale brands -- among them Copenhagen, Skoal and Red Seal -- for discount cans. This has prompted the company to spend more on marketing to persuade chewers to trade up. Meanwhile, UST has cut other costs to prevent the promotional blitz from decimating the bottom line. The strategy has born some fruit. On January 25, UST reported 2006 earnings of $3.12 per share, beating the average of analyst forecasts by two cents a share. The company credited more sales from its premium tobacco brands, lower costs and a record year for its wine business for the results. It also forecast 2007 earnings of $3.30 per share, with a possible range of $3.25 to $3.40. JP Morgan analyst Erik Bloomquist looks for earnings to come in at $3.34 a share. "We expect the company to over-deliver on its stated goals," he says. Why? Promotional efforts are paying off, cost-cutting will continue to improve profits, and prices for discount chaw are rising, he says. Bloomquist expects UST volumes to increase as much as 2% for premium tobacco and 12% for low-cost brands in 2007 because of the company's marketing push. He predicts that UST's cost-cutting moves will generate savings of at least $45 million this year. Plus, UST raised the price of its discount brand, Husky, by 10 cents a can in November 2006 after its smaller rival Conwood did the same. The battle for the smoker's next vice is intense and presents a growth opportunity for UST. The number of cigarette smokers in the U.S. is declining, but some switch to smokeless tobacco as an alternative way to get their nicotine fix. Tobacco giants such as Reynolds American and Altria have launched smokeless tobacco products aimed at customers who quit cigarette smoking. The products they hope offer the most profitable alternatives to cigarettes are little white pouches of smokeless tobacco called snus (pronounced snoose). Last year, Reynolds introduced Camel Snus, Philip Morris followed with snus called Taboka and UST tested Skoal Dry snus. A slew of snus makes some investors jittery about UST’s competitive edge. Bloomquist thinks Altria may be thinking about building a snus-making factory. If Altria announces that it’s going ahead, UST shares are likely to sell off. But that could be an opportune time to buy UST shares, he says. The stock (symbol UST) surged 2.4% on January 25, to $57.67, after UST announced its earnings and Bloomquist upgraded the stock to "overweight" from neutral. UST shares trade at 17 times the company’s 2007 earnings estimates. Bloomquist thinks the stock, which yields 4.1%, is worth $65 a share.