Thursday, August 20, 2020

Cigarette Sales Stabilizing?

We did a post in October, Opportunity in the Big Tobacco Duopoly? about the possibility of Philip Morris, Altria, and British American Tobacco as investments. The shares have traded in a huge range since that post, but are essentially flat. They had a big run up into February and then huge March crash, followed by recovery to where they were last fall.

We saw the chart below showing that cigarette volumes were actually flat y/o/y in recent weeks. That is encouraging because we did not like how cigarette companies were maintaining revenues by continually raising prices faster than the rate of inflation. It is a better sign if the volumes plateau with some core group of smokers who aren't "quitters".

Phillip Morris is now trading at 20x their 1H 2020 annualized earnings. They're the international Marlboro business (Altria is U.S.). PM has better management - no acquisitions - they send all the money home.

Altria trades at only 11 times earnings, although their situation is a lot more complicated because of acquisitions they have made. They own a huge stake in BUD, Juul, Cronos, plus they own the Chateau Ste Michelle winery. The U.S. cigarette business isn't as good as PM's foreign business though - 1H 2020 volumes were down almost 2%. Although revenues were up almost 4%, it's still better not to see volume declines because pricing power isn't infinite.

Previously regarding tobacco:
  • Making up for volume declines with price increases has been the tobacco playbook but I wonder if it will hold true in the future. By using this strategy at this point cigarettes have become a VERY expensive product. So personally I'm not sure how much water there is left in that well. Add in the social pressure/stigma around smoking in America and it's not a great picture for Altria. I'd say that the same applies to PM. While the volume declines for PM have been lower than the ones at MO, PM has continued with the price hike strategy at a regular pace. Their customers are more in developing countries and while the price of cigarettes is lower there the cost is arguably higher. A one pack a day habit will consume 20%-30% of a person's take home pay. That's A LOT! So that is why I'm starting to question the assumption that cigarette companies will just hike prices to cover any problem. [CoBF]
  • I was also unbelievably surprised at the amount of tobacco smoking that occurs in Europe. I had not been to the continent in at least 12 years now but I was struck at how many people, in Spain specifically that were smokers and that also were looking for a "non vape" alternative as vapes are viewed as dirty and for kids. If I had planned this trip accordingly and without embellishing I could have sold at minimum 20 IQOS devices and Heetsticks and likely paid for at least my hotels with the profits. As an unwitting ambassador of Philip Morris (PM) I introduced waiters, waitresses, bartenders, hotel guest and taxi drivers to this device and the response was nearly universal, strong buy! [Seeking Alpha]
  • I paid for my kids College by buying big tobacco when Obama passed the bill which caused the stock prices to drop sharply. I read the bill and saw that it entrenched the oligopoly so I purchased. Maybe this is another such opportunity for young parents. Watch for the bill. You have to be patient with big tobacco but you can't beat the effect of those massive cash flows have on compound growth rate of stock when the monies are used for dividends and share buy-backs. The trouble here is impatient management who took too long to get into vaping then panicked and failed to put sufficient trust in their friends in Congress. [CoBF]
  • Despite the billions of dollars cigarette companies invested in new technologies, it took a start-up to popularise e-cigarettes. Founded in 2015, Juul Labs has seized more than 70 per cent of the US vaping market, a market that is growing fast: the US now has 14m adult vapers alongside its 39m adult smokers, Wells Fargo estimates. The speed of these changes has forced cigarette makers to respond. Last year, Altria invested $13bn in Juul for a 35 per cent stake, pledging to use its sway with retailers to promote Juul's products. The tobacco group's efforts to diversify have also seen it spend $1.8bn on a 45 per cent stake in Cronos, a Canadian cannabis company, and $372m for a majority stake in Burger Söhne, the Swiss manufacturer of On, an oral nicotine brand. [FT]

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