Investing in Cuba: Cigars, Rum, & the Fortune 500

The Motley Fool/ By Nick Slepko 

Cuba's iconic tobacco and alcohol products are the benchmark vices for many – including Americans which are still the largest consumers of the island’s sin exports.

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After acquiring Spain’s Altadis in 2008 with its 50% interest in Cuba’s state cigar monopoly Habanos, Britain’s Imperial Tobacco (NASDAQOTH: ITYBY.PK) became the leading distributor for the island’s premium tobacco products.  Although in 2010, Habanos lost its legal battle in American courts against the Miami-based Guantanamera Cigars Company for the rights to the Guantanamera brand in the US.  Today, Habanos still sells its “affordable” Guantanamera in other jurisdictions, but GCC’s premium version is an increasingly preferred choice in the markets where they compete directly.  (Although, Florida's most powerful Cuban-American, Senator Marco Rubio, still tends to wax nostalgic over Nicaragua-sourced Padrons manufactured by Tampa-based Piloto Cigars.  Evidently Central American communists are preferable to Caribbean ones.)

However, both Habanos and Guantanamera, along with others, are finding their bottom lines hit hard by counterfeiters.  While not at all what Che Guevara would have envisioned (mostly for his lack of imagination), Habanos has introduced online authentication for its products as a major step in brand protection.  Interestingly, it is similar to many new systems being tested to verify pharmaceuticals by end consumers around the world (in part to avoid counterfeit drugs that are originating from places like Cuba).  Whether or not Cuba’s most famous product has been able to maintain its craftsmanship, there is no disputing it has retained its mystique.

James Suckling, former European editor of Cigar Aficionado and producer of the documentary Cigars: The Heart and Soul of Cuba, estimates that Americans are still the cigars’ largest consumers (accounting for a quarter of end-users often “through Switzerland and other channels”) despite the legal restrictions on US citizens acquiring or consuming Cuban products even when abroad.  Suckling estimates that:

…global sales of Cuban cigars were up nine percent to about $401 million, with particular growth in Asia Pacific, Middle East, Russia, and Latin America. Habanos would not reveal how many cigars were sold, but estimates are between 80 million and 90 million cigars in 2011.  I would suggest that Americans, in reality, accounted for $150 million to $200 million of the Cuban cigar sales in 2011.

The current state of Cuban rum offers even more of an insight into Ghosts of Lawyers Yet to Come for the long-assumed US-Cuba rapprochement.  As with physical property, Cuban intellectual property is a hotly disputed topic, not least of all because so many parties impacted are still alive (and have documentation – and an unrequited passion for vengeance/justice).

Earlier this year, the US Supreme Court declined to intervene over state-owned CubaExport’s petition to renew its US trademark on the Havana Club rum brand name which seems to have put an end to a decade-old dispute.  France’s Pernod Ricard (NASDAQOTH: PDRDF.PK), the world’s major rum distributor, sued Bermuda-based private distiller Bacardi in 1998 when it began selling rum under the name Havana Club.  Using political connections and special legislation pertaining to expropriated Cuban properties, Bacardi successfully weathered the legal assault and retained its trademark to the prestigious name in the United States – which accounts for 40% of the world rum market.  Now that Pernod appears to have exhausted its legal options, it has announced intentions to retail the alcohol under the name Havanista in American outlets when the embargo is lifted.

If history is any guide, then the Pernod-Bacardi divide may spend the decade after the Castros’ passings developing along the lines of the Mercks.  America’s Merck & Co., Inc. (NYSE: MRK) was created from the confiscated assets of Germany’s Merck KGaA (FWB:MRK) during World War I.  Both companies still operate independently (though US Merck is four times larger now by revenues, and German Merck operates in North America under the name EMD).

Still, more interesting for American investors in the short-term may not be Cuban exports, but rather which US companies have been able to squeeze out what little hard currency the country is able to generate each year.  Nowadays, it is less likely that the Cuban diplomatic missions are printing their own US dollars (North Koreans have aced them out of that market), and it is more likely that Cuban enterprise is the victim of counterfeit pesos and lost market share to counterfeit cigars – over a million dollars in fakes are seized every year in the US (and considering what a low-priority the industry is for American law enforcement compared to illegal downloading witch hunts, pharma and narcotic smuggling, and general terrorist plots, it is likely this figure is an infinitesimal fraction of the real problem).

In 2011, at least 83 US for-profits (companies and individuals) received (or renewed) licenses to engage in Cuban activities.  Minneapolis-based travel consultancy Navitaire – a subsidiary of Dublin-headquartered Accenture (NYSE: ACN) – had its four-year license extended another four, however it seems to be a rare exception.  Of the few licenses that indicate expiration dates, none are valid for more than two years – and it appears Bank of America (NYSE: BAC) has been renewing its arrangements since 1964 (possibly OFAC’s longest-running license holder for trade with Cuba.)

Also, considering official statistics from all sides which reflect declining trade between the US and Cuba, there are probably less than 200 for-profit US entities licensed to do business with Cuba.  Of those that can be identified from the 2011 cohort (which is less than half), their activities range from horse breeding and funeral services to tourism- and medical-related enterprises.  While less than a quarter of the for-profits are likely to be publicly-traded American companies, only 34 are clearly connected to any of the recent licenses: 

American Express	NYSE	AXP
Archer Daniels Midland	NYSE	ADM
AT&T	NYSE	T
Bank of America	NYSE	BAC
Bank of New York	NYSE	BK
Baxter Healthcare	NYSE	BAX
Becton Dickinson	NYSE	BDX
Bemis Company	NYSE	BMS
Boeing	NYSE	BA
Cisco	NASDAQ	CSCO
Citigroup	NYSE	C
Coca-Cola	NYSE	KO
Diageo North America	NYSE	DEO
Dresser-Rand	NYSE	DRC
FMC Corporation	NYSE	FMC
Gen Re (Berkshire Hathaway)	NYSE	BRK-A, BRK-B
General Cigar (Swedish Match)	NASDAQOTH	SWMAF.PK
Google	NASDAQ	GOOG
JPMorgan Chase	NYSE	JPM
M&T Bank	NYSE	MTB
Marriott	NYSE	MAR
Mercer (Marsh & McLennan)	NYSE	MMC
MoneyGram	NYSE	MGI
Navitaire (Accenture)	NYSE	CAN
Northern Trust	NASDAQ	NTRS
Pfizer	NYSE	PFE
Princess Cruises (Carnival)	NYSE	CCL
Rockwell Collins	NYSE	COL
Thermo King (Ingersoll-Rand)	NYSE	IR
Utah Medical Products	NASDAQ	UTMD
Walmart	NYSE	WMT
Wells Fargo	NYSE	WFC
World Fuel Services	NYSE	INT
Xerox	NYSE	XRX

Still, with many of these corporations on the Fortune 500, even a functional Cuban economy is unlikely to make a huge impact on their tickers.  However, they may be good indicators of areas where other American companies with their geography and efficiencies have yet to penetrate due to sanctions and reservations.  In the decade following the end of the Castros, it is likely that only a handful of Latin American countries will field companies that can compete for the long-haul with the US when the embargo is lifted.  Meanwhile, the less advantaged Canadian and European enterprises are likely to be margined out when the Miami-Havana link becomes a bridge of cargo ships spanning the Florida Strait.  (Although, in a number of cases, it will just be a matter of changing the flag and restructuring subsidiaries that are truly US in all but name at the moment.)