MO - Altria Corp

[Aberhound]

The big money from vaping won't come until cannabis is legalized federally. Instead this fuss is likely an attempt to impose a regulatory burden on vaping that has been so beneficial to big tobacco with tobacco products. Perhaps the legalization of cannabis is delayed until this vaping regulatory burden is put in place. So to me the crisis is a positive for big tobacco but we won't see it until the legislation which entrenches the oligopoly is passed and then another jump when cannabis is legalized federally.

 

What we need is tracking of the stock purchases by insiders in Congress. Now there's a business for some poorly paid intern. 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. Let's hope they wait for the plunge in cannabis prices before they buy. The low cost of product will likely create a bloodbath like you see in pork from time to time due to overproduction when prices are favourable. I met a Columbian legalized producer. He told me the export of bud is illegal. Since the money is made moreso in bud with higher value products the leaves become a cheap byproduct to be dumped. How will those who grow in buildings or greenhouses compete? Obviously they have to focus on bud but this is illegal and sale is heavily restricted. When allowed the industry here will focus on bud and high value products and dump the leaves. Big tobacco could contract the supply of cheap leaves and make great margins but first the industry has to be legalized. They certainly have done a good job contracting most of the tobacco growers. Since properly grown tobacco is much less harmful to the health I have always been surprised that a more healthy clean tobacco has not come on the market to any significant extent.

[LC]

Instead this fuss is likely an attempt to impose a regulatory burden on vaping that has been so beneficial to big tobacco with tobacco products. Perhaps the legalization of cannabis is delayed until this vaping regulatory burden is put in place. So to me the crisis is a positive for big tobacco but we won't see it until the legislation which entrenches the oligopoly is passed and then another jump when cannabis is legalized federally.

I agree wholeheartedly. If you'll notice IQOS is a true "vaping" product - heat the leaf and inhale the fumes. Where did this technology originate in consumer products? Puff Puff Pass, my friends  ;D

 

What we need is tracking of the stock purchases by insiders in Congress. Now there's a business for some poorly paid intern

It is possible, I started a thread about it here:

http://www.cornerofberkshireandfairfax.ca/forum/strategies/housesenate-financial-disclosure-reports/

 

The low cost of product will likely create a bloodbath like you see in pork from time to time due to overproduction when prices are favourable

Agree again. Cannabis prices are rock bottom and as seen in all forms of agriculture over time it is a race downwards.

 

Glad you came out to play today, Abe ;)

 

[mwtorock]

slightly off topic: out of the big tobacco companies, which one you think have the best management?

 

 

[Foreign Tuffett]

In support of my contention that current vaping devices have little to no pricing power:

 

Juul starter kit is currently $19.99 on Juul's site

 

BTI's Vuse Alto starter kit, a nearly identical offering, is $14.48

 

 

BTI is trying to take market shares from Juul by competing on price.

 

 

[gjangal]

Isn’t selling additional pods is where the profit is. I agree to some extent that pricing power is not unlimited as has been proven in the case of Personal care products and razor blades, but bulk of the profit lies in selling you additional pods.

[Foreign Tuffett]

Isn’t selling additional pods is where the profit is. I agree to some extent that pricing power is not unlimited as has been proven in the case of Personal care products and razor blades, but bulk of the profit lies in selling you additional pods.

 

BTI is undercutting Juul on pod pricing as well. $13.49 for 3.6ml vs $15.99 for 2.8ml -- the pods are different sizes so you have to compare by looking at how much liquid you are getting in each pack

[Foreign Tuffett]

This is probably a pass for me. The status quo isn't good for the industry. Big Tobacco needs Big Gov to require that all vaping devices (or, alternatively, all nicotine products) go through a strict, time consuming, and ultra expensive FDA approval process. I'm not comfortable betting that is going to happen.

 

Despite having side effects, nicotine gum has been an OTC product in the US for decades. Also, I feel reasonably confident that Juul and other mainstream vaping products are safe when used in the intended manner.

 

* Edited to add clarity

[Spekulatius]

This is probably a pass for me. The status quo isn't good for the industry. Big Tobacco needs Big Gov to require that all vaping devices (or, alternatively, all nicotine products) go through a FDA approval process. I'm not comfortable betting that is going to happen.

 

Despite having side effects, nicotine gum has been an OTC product in the US for decades. Also, I feel reasonably confident that Juul and other mainstream vaping products are safe when used in the intended manner.

 

I don’t own tobacco, but I feel the risk reward may be good at current prices. On a high level, I think the tobacco business will morph into a Niccotine business, where vaping becomes probably the dominant delivery method over time. Also, think about this, the youth vaping has created a new generation of Niccotine addicts that have a pot. enormous NPV for the industry. Niccotine is very addictive and very hard to quite, it is on par with Heroine in terms of addictiveness. So a lot of the teens that are hooked will probably consume Niccotine for their entire lives.

 

Gums don’t provide the same kind of hit that smokers grave, so I don’t think it’s really competition. it’s kind of a sad picture that I write here, but could financially quite rewarding, I almost hope I am wrong. It can be very profitable to kill people very slowly.

[Foreign Tuffett]

This is probably a pass for me. The status quo isn't good for the industry. Big Tobacco needs Big Gov to require that all vaping devices (or, alternatively, all nicotine products) go through a FDA approval process. I'm not comfortable betting that is going to happen.

 

Despite having side effects, nicotine gum has been an OTC product in the US for decades. Also, I feel reasonably confident that Juul and other mainstream vaping products are safe when used in the intended manner.

 

I don’t own tobacco, but I feel the risk reward may be good at current prices. On a high level, I think the tobacco business will morph into a Niccotine business, where vaping becomes probably the dominant delivery method over time. Also, think about this, the youth vaping has created a new generation of Niccotine addicts that have a pot. enormous NPV for the industry. Niccotine is very addictive and very hard to quite, it is on par with Heroine in terms of addictiveness. So a lot of the teens that are hooked will probably consume Niccotine for their entire lives.

 

Gums don’t provide the same kind of hit that smokers grave, so I don’t think it’s really competition. it’s kind of a sad picture that I write here, but could financially quite rewarding, I almost hope I am wrong. It can be very profitable to kill people very slowly.

 

Yeah, nicotine addicts don't seem to prefer nicotine gum. Lots of generic nicotine gums exist, so there is price competition. Kirkland and Rite Aid both have their own nicotine gums. I doubt anyone is making much money selling it. People like vaping more than they like chewing nicotine gum but why won't the future structure of the vaping market look more like nicotine gum than it does cigs?

 

Big Tobacco needs a regulatory "bail out" so that Juul and Vuse obtain pricing power.

 

 

* Edited because I need to learn to type

[DooDiligence]

Willard showed how unimaginative he is when he decided to extend the business into additional addictive products.

 

From now on I'll stick to businesses that try to do something useful.

 

Bad karma with this industry.

[banellie]

Here is a good Twitter thread about the vaping scare and how it impacts the tobacco industry:

 

 

https://twitter.com/SuperMugatu/status/1179871479628009485

 

[DooDiligence]

Here is a good Twitter thread about the vaping scare and how it impacts the tobacco industry:

 

 

https://twitter.com/SuperMugatu/status/1179871479628009485

 

I respect what that guy writes & hope he's right.

[banellie]

So You Want to Quit Vaping? No One Actually Knows How:

 

https://www.wired.com/story/so-you-want-to-quit-vaping-no-one-actually-knows-how/

[sleepydragon]

https://www.wsj.com/articles/cigarette-makers-can-filter-tougher-smoking-rules-11576150912

https://assets.empirefinancialresearch.com/static/this-iconic-global-brand-is-the-cheapest-its-been-in-a-decade-and-its-about-to-rally-2673.html

 

[Munger_Disciple]

Interesting Bloomberg Opinion piece on Vaping:

 

https://www.bloomberg.com/opinion/articles/2019-12-19/u-s-prefers-mass-hysteria-to-sound-policy-on-vaping?srnd=premium

 

 

[sleepydragon]

Interesting Bloomberg Opinion piece on Vaping:

 

https://www.bloomberg.com/opinion/articles/2019-12-19/u-s-prefers-mass-hysteria-to-sound-policy-on-vaping?srnd=premium

 

The author is right. Vaping is much more addictive than cigarettes. But if vaping is banned, it will actually be very good for tobacco companies.

The market is mis pricing the whole situation about MO’s JUUL stake. It shall be seen as MO’s hedge on it’s tobacco business.

Unfortunately, it seems people didn’t stop vaping despite the recent negative news. Otherwise stock would be higher.

 

 

[DooDiligence]

I went into a convenience store the other day & noticed that the vape section had shrunk dramatically.

 

Stopped in to check each of the major chains & the same thing has occurred.

 

The Navy exchange has removed ALL vaping products.

 

I'm still convinced that Howard Willard is an idiot,

but I'm going to hodl on because I'm an idiot too.

[DooDiligence]

Another write down on the Juul stake.

 

www.wsj.com/articles/altria-takes-4-1-billion-writedown-on-juul-investment-11580386578

 

I hope Howards compensation takes a similar hit.

 

The man is an idiot.

[LC]

Agreed but I'm happy they took the write down. Ensures the calls I wrote will expire worthless, and I can pick up shares cheaper in the future.

[Foreign Tuffett]

From the press release, full year 2019:"When adjusted for trade inventory movements and other factors, smokeable products segment domestic cigarette shipment volume decreased by an estimated 7%"

 

This is exactly what you don't want to see if you're an MO investor.

[frommi]

From the press release, full year 2019:"When adjusted for trade inventory movements and other factors, smokeable products segment domestic cigarette shipment volume decreased by an estimated 7%"

 

This is exactly what you don't want to see if you're an MO investor.

 

I see OCI of 9.9 billion for 2017 and 2018 and 10.8 for 2019 and this is exactly what i want to see as a MO investor.

[LC]

Volume declines are very much an important metric and should be watched carefully. Eventually, $100/unit * 0 units = $0 sales

 

MO Volumes decreased from about 148M in 2009 to 100M in 2019. That is not insignificant.

 

For those concerns it may be smarted to also look at PM, where volume declines are much-less-drastic. My holdings are split about 50/50 between MO & PM, and I will probably shift more towards PM over the next 2-3 years if/when pricing opportunities present themselves.

[Foreign Tuffett]

Historically Big Tobacco has been able to mitigate volume declines due to its massive pricing power. Smokers are literally addicted to the product and have strong brand preferences.

 

Juul and its imitators have changed the game, and now Y/Y cig volume declines are much, much higher than they were just a few years ago. Sure, cig prices will continue to rise, but as that happens the gap between the cost of smoking cigs and the cost of vaping will continue to widen -- which will accelerate volume declines even further.

 

Q4 2015 earnings release: "PM USA estimates that total industry cigarette volumes were essentially unchanged in the fourth quarter and declined by approximately 0.5% for the full year." Compare that to the 7% # for 2019 I quoted in my last post. 

 

 

[rb]

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.

 

Btw, the social pressures around smoking didn't yet materialize in developing countries but they will. When that happens it could get hairy for PM and BATS.

[LC]

Altria volume declines:

 

2009 148.7 0

2010 140.8 -5.31%

2011 135.1 -4.05%

2012 134.9 -0.15%

2013 129.3 -4.15%

2014 125.4 -3.02%

2015 126.0 0.48%

2016 122.9 -2.46%

2017 116.6 -5.13%

2018 109.8 -5.83%

2019 101.8 -7.29%

 

PM volume declines:

 

2009 864.0 0

2010 899.9 4.16%

2011 915.3 1.71%

2012 927.0 1.28%

2013 880.2 -5.05%

2014 855.9 -2.76%

2015 847.2 -1.02%

2016 812.9 -4.05%

2017 761.9 -6.27%

2018 740.3 -2.84%

2019 - -