Author Topic: PM - Philip Morris International  (Read 52782 times)

Foreign Tuffett

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Re: PM - Philip Morris International
« Reply #170 on: April 20, 2018, 06:44:37 AM »
PM’ revenues and volumes were below expectation.

I am bearish on tobacco because I think smokeless products will replace tobacco quicker than many think and won’t be nearly as profitable , plus new entrants can take significant market share with a better product (see Juules).

I did lots of work on Altria last year, but never jumped in for basically the reason you outline (among other things, including valuation). Big Tobacco USA (Altria and Reynolds) have a massive moat due to scale, brand loyalty, and the severe advertising restrictions that make it very, very difficult for new brands to gain traction. However, their moat is in traditional tobacco products, not e cigarettes and other technology based nicotine delivery devices. As of mid-2017 (the last time I updated my model) Altria's e cigarette segment (Nu Mark) wasn't even profitable! In 2015 cigarettes volumes in the US declined by something like ~10%, an accelerated pace compared to past years. This, along with the mom-and-pop "vaping" retail shops that have popped up everywhere, signaled to me that younger nicotine addicts were moving away from traditional cigarettes fairly quickly. Altria really needs the FDA (or some other government agency) to bail them out by regulating e cigarette and vaping industry so that it becomes more akin to the traditional cigarette market. I wasn't willing to bet on this happening.   

PM has been the most aggressive of the big cigarette companies in investing in next generation products. iQOS/HeatSticks garnered lots of traction in Japan very quickly. However, Japan is the ultimate fad driven market, and vaping-type devices are banned. I felt the market was extrapolating PM's Japanese success to other markets without recognizing the Japanese market's uniqueness. 

In sum, I don't think next gen nicotine delivery products are, or are likely to be, anywhere nearly as "moaty" as traditional tobacco products have been.     




bathtime

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Re: PM - Philip Morris International
« Reply #171 on: April 20, 2018, 07:21:22 AM »
Purely anecdotal. I teach in a high school. It struck me a moment ago reading this thread that I can't remember seeing a high school kid smoking a regular cigarette anywhere near my school in the 2.5 years I've taught there. Not outside the school, not outside nearby coffee shops. Clearly I'm not paying full attention - or they are doing it elsewhere -  as it can't be zero. But that is way different than when I was in high school.

doughishere

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Re: PM - Philip Morris International
« Reply #172 on: April 20, 2018, 07:36:32 AM »
Purely anecdotal. I teach in a high school. It struck me a moment ago reading this thread that I can't remember seeing a high school kid smoking a regular cigarette anywhere near my school in the 2.5 years I've taught there. Not outside the school, not outside nearby coffee shops. Clearly I'm not paying full attention - or they are doing it elsewhere -  as it can't be zero. But that is way different than when I was in high school.

Why would you smoke cigarettes from one of these companies? Its all downside. At least marijuana and e-cigs dont have all those chemicals that arent natural. Best estimates show that vaping is 95% safer than smoking tobacco cigarettes. Note, im not sayin its safe just safer. I think some studies claim that there 7,000 compounds inhaled in tobacco smoke. Whats the benefit of that?

You dont need a lighter, theres no butts to throw on the ground and i can fit my cig-pen in anything. If im a high schooler i can whip my pen out when the teacher isnt looking, take a drag, and blow it out the window or something....it literally takes 3 seconds and its quiet.


If you ask me the kids are just being smarter than their adult counterparts. Its not messy. It doesnt stink. It a 10000x better product and i can even get one that cherry flavored if I want to.


« Last Edit: April 20, 2018, 07:42:53 AM by doughishere »

orthopa

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Re: PM - Philip Morris International
« Reply #173 on: April 20, 2018, 11:53:56 AM »
PM’ revenues and volumes were below expectation.

I am bearish on tobacco because I think smokeless products will replace tobacco quicker than many think and won’t be nearly as profitable , plus new entrants can take significant market share with a better product (see Juules).

There is no evidence to suggest that smokeless products will be less profitable. In fact it should be just the opposite. What evidence do you have of this?

Better products will come and go with trialing. FDA will over time regulate most competition due to regulations, fees or studies needed for product verification.

orthopa

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Re: PM - Philip Morris International
« Reply #174 on: April 20, 2018, 11:55:46 AM »
IMO the drop is due mostly due to valuation coming inline. A lot of consumer staples and tobacco had over time. PM had not yet. PM is finally back in line with historical valuation metrics.

Its way to early to have an honest opinion on the future of any of the cigarette alternatives. This uncertainty was a hit too.

Spekulatius

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Re: PM - Philip Morris International
« Reply #175 on: April 20, 2018, 06:04:30 PM »
PM’ revenues and volumes were below expectation.

I am bearish on tobacco because I think smokeless products will replace tobacco quicker than many think and won’t be nearly as profitable , plus new entrants can take significant market share with a better product (see Juules).

There is no evidence to suggest that smokeless products will be less profitable. In fact it should be just the opposite. What evidence do you have of this?

Better products will come and go with trialing. FDA will over time regulate most competition due to regulations, fees or studies needed for product verification.

I think more competition will make it very hard to replicate the high profit margins with tobacco. There is no way off knowing, but I think it is a fallcacy to believe that smokeless tobacco will be as profitable as tobacco. We have seen already that disruptors can get into this market and get a huge market share, if their product is better.  Smokeless tobacco is a new game, and I could see new entrants from the consumer food business or pharmaceutical companies try to play in this sandbox. Other than
Marketing muscle, I don’t think the tobacco companies have much of an edge.
To be a realist, one has to believe in miracles.

orthopa

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Re: PM - Philip Morris International
« Reply #176 on: April 21, 2018, 04:39:46 PM »
PM’ revenues and volumes were below expectation.

I am bearish on tobacco because I think smokeless products will replace tobacco quicker than many think and won’t be nearly as profitable , plus new entrants can take significant market share with a better product (see Juules).

There is no evidence to suggest that smokeless products will be less profitable. In fact it should be just the opposite. What evidence do you have of this?

Better products will come and go with trialing. FDA will over time regulate most competition due to regulations, fees or studies needed for product verification.

I think more competition will make it very hard to replicate the high profit margins with tobacco. There is no way off knowing, but I think it is a fallcacy to believe that smokeless tobacco will be as profitable as tobacco. We have seen already that disruptors can get into this market and get a huge market share, if their product is better.  Smokeless tobacco is a new game, and I could see new entrants from the consumer food business or pharmaceutical companies try to play in this sandbox. Other than
Marketing muscle, I don’t think the tobacco companies have much of an edge.

Competition over time will get weeded out. In US marketing is very limited and FDA requirements will weed out many competitors. For the most part big tobacco is in the back pocket of the FDA. All FDA has to do is impose studies costing millions of dollars or initiate testing or fees in the 10s of millions and you weed companies out real quick. If you believe there will be no more high margins how do you expect this naive young companies to survive? They are cash hungry as it is. JUUL just had to raise 150 million in december. Thats 19 HOURS of sales for PM for the year.
One one hand you cant say big tobacco is going to falter with margins that will hurt them but not others. Fine, let the margins blow, In that situation its race to the bottom of the deepest pockets. Competition goes bye bye in short order. Look at NJOY as an example.

Tastes are evolving. How long or how many times can say for example JUUL retool to meet changing demands. Not many I would think. Its also foolish to think food companies/pharms will get into nicotine delivery, thats guaranteed in the US (ever heard of the master settlement agreement?) and would be ominous overseas for many companies. Your thinking too hard. :)

Secondly for example with PM once over time as device sales meet demand and devices are not discounted HEETS actually have a higher profit margin. The secret? They sell for a premium price but in many areas already have lower excise taxes due to lower risk claims. There are your margins. The consumers dont know the excise tax difference. Also have to keep in mind that many smokers will trial but once they settle on a taste they are willing to pay up for the product and history in US has shown this. Pricing pressure will be temporary as demand is met.

« Last Edit: April 21, 2018, 04:43:27 PM by orthopa »

Foreign Tuffett

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Re: PM - Philip Morris International
« Reply #177 on: April 22, 2018, 02:35:17 PM »
PM’ revenues and volumes were below expectation.

I am bearish on tobacco because I think smokeless products will replace tobacco quicker than many think and won’t be nearly as profitable , plus new entrants can take significant market share with a better product (see Juules).

There is no evidence to suggest that smokeless products will be less profitable. In fact it should be just the opposite. What evidence do you have of this?

Better products will come and go with trialing. FDA will over time regulate most competition due to regulations, fees or studies needed for product verification.

I think more competition will make it very hard to replicate the high profit margins with tobacco. There is no way off knowing, but I think it is a fallcacy to believe that smokeless tobacco will be as profitable as tobacco. We have seen already that disruptors can get into this market and get a huge market share, if their product is better.  Smokeless tobacco is a new game, and I could see new entrants from the consumer food business or pharmaceutical companies try to play in this sandbox. Other than
Marketing muscle, I don’t think the tobacco companies have much of an edge.

Competition over time will get weeded out. In US marketing is very limited and FDA requirements will weed out many competitors. For the most part big tobacco is in the back pocket of the FDA. All FDA has to do is impose studies costing millions of dollars or initiate testing or fees in the 10s of millions and you weed companies out real quick. If you believe there will be no more high margins how do you expect this naive young companies to survive? They are cash hungry as it is. JUUL just had to raise 150 million in december. Thats 19 HOURS of sales for PM for the year.
One one hand you cant say big tobacco is going to falter with margins that will hurt them but not others. Fine, let the margins blow, In that situation its race to the bottom of the deepest pockets. Competition goes bye bye in short order. Look at NJOY as an example.

Tastes are evolving. How long or how many times can say for example JUUL retool to meet changing demands. Not many I would think. Its also foolish to think food companies/pharms will get into nicotine delivery, thats guaranteed in the US (ever heard of the master settlement agreement?) and would be ominous overseas for many companies. Your thinking too hard. :)

Secondly for example with PM once over time as device sales meet demand and devices are not discounted HEETS actually have a higher profit margin. The secret? They sell for a premium price but in many areas already have lower excise taxes due to lower risk claims. There are your margins. The consumers dont know the excise tax difference. Also have to keep in mind that many smokers will trial but once they settle on a taste they are willing to pay up for the product and history in US has shown this. Pricing pressure will be temporary as demand is met.

I bolded where your thinking is backwards. Big Tobacco needs high margins if it wants to maintain its highly profitable business model. Contra what you seem to be asserting, a "price war" type of scenario would be a horrible outcome for Big Tobacco shareholders. The industry has thrived because it has largely been insulated from price driven competition!

Also, the idea that a price war would destroy all the e cigarette and vaping competition, thus allowing the industry to return to its "regularly scheduled programming" of high margins is naive.

actuary

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Re: PM - Philip Morris International
« Reply #178 on: April 22, 2018, 07:34:03 PM »
Fascinating subject here... It is remarkable what this industry has been able to achieve for owners over long periods of time. Any prediction of disruptive change needs some humility, but here is a case where we particularly have to respect "base rates."

Agree with prior posters about big tobacco being largely a combustible play, mr market aligning valuations with other staples, rising interest rates, etc.

Vapor has been around for a while now and has not really changed the algorithm for big tobacco. A few weeks ago we had splashy articles in wsj/nyt about high schoolers and juul, but high school cigarette use has been plummeting for decades. If vapor is supporting youth nicotine use in recent years, I would argue that represents long-term opportunity for big tobacco.

This is a business that pursued the "depth approach" in marketing aggressively and early. If you read The Hidden Persuaders, you can see it was known in the 50s that people could not distinguish cigarette brands in blind taste tests. Well, they aren't selling taste. This is an industry that understands branding and the psychology of nicotine addiction. One quote I love of mid-20th century psychologists is there are basically two reasons people smoke - to feel older and to feel younger.

We are to the point now where there is an unfathomable about of cultural memory/identity related to cigarettes. It is not going away. When you look at all this 20th century culture, cigarettes are ubiquitous and... cool. It takes a long time for this tail to run out. And the evidence is you have all the science, education, taxes, restrictions, social norms, alternatives, etc.... it has not really changed the algorithm of predictable unit declines and pricing power that can outpace them.

I saw some article recently on vapes saying that by 2100 only 1% of the us population would smoke cigs. That would be a fine result for MO.

Something to keep in mind with PM for example is you are selling 800 billion sticks per year on 1.5 billion shares out. So if you are thinking about additional pricing action in terms of fractions of a cent per stick, you can see how that translates to earnings...

Back of the envelope not long ago, I was seeing something like cigarette prices in the US have compounded at 8% p.a. since 1950. Cigarette prices here are very low relative to disposable income. Look at what people pay for beer or liquor. And you get more brand loyalty with the "guilty pleasure" staples. This is a product with plenty of money on the table, but they have to take a balanced approach not to instigate too many additional taxes. I would like to see them get more aggressive, and MO has to lead. It would be nice to see them take the twice yearly change from 10 cents to 15. Cigarettes can move to $20 per pack real in the US.

PM in recent years has done a lot of investment through the income statement. Given their capital allocation record and the various advantages they have, what should we expect here? Surely they are setting a high bar given that the core business can grow earnings without any reinvestment. Iqos doesn't have to take 20% share outside Japan to be an excellent investment.

There is a lot to like here relative to other staples. Oligopoly industry, legal risks largely settled, tremendous pricing power, management respects owners, ability to grow earnings without any reinvestment. Weighing all the evidence, it seems like this should trade at a premium to other staples and the market. Yet you get MO and PM at 14-16x. And that is with them able to invest through the income statement, grow earnings 8-9% predictably, and return all earnings to shareholders. Also, there is some marijuana optionality here.


rb

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Re: PM - Philip Morris International
« Reply #179 on: April 22, 2018, 09:25:12 PM »
Fascinating subject here... It is remarkable what this industry has been able to achieve for owners over long periods of time. Any prediction of disruptive change needs some humility, but here is a case where we particularly have to respect "base rates."
This is so true. How many times did talking heads predict the death of the tobacco companies?

I remember I owned some Altria back in 2006. At that point it already smoked (sorry for the pun) the S&P 500 for the past 5 years. Its market cap was about $35 billion and it wasn't a cheap multiple. After I made like 10-15% I sold it because everyone was talking about competition, vapour, massive legal challenges, etc. I thought I shouldn't be in it for the long term. Now that Altria is 4 companies: Altria 108B market cap, Mondelez 59B market cap less 19B they paid for Cadbury=40B, Phillip Morris International 131B market cap, and Kraft taken out by Heinz at 45B market cap. That's 324 billion of market cap. Oh and they've paid a shitload of dividends in the meantime.

To put this in perspective, this performance destroyed Google which was at 140B market cap in 2006. Just good old cigarettes.