MO - Altria Corp

[HalfMeasure]

They can't set up their own operation.

 

Step 1

 

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/excise-duties-levies/apply-cannabis-licence.html

 

Keep in mind, the incumbent tabacco companies operating in the U.S. have to play the situation with a certain finesse due to the importance of the tobacco lobby. If they go off pioneering in a substance that isn't decriminalized nation wide, they run the risk of stepping offside politically which could quickly cost more than $2.4bln. Having an investment in a separate company is significantly different optically from building it internally, and in this case there's value to such separation.

[DooDiligence]

They can't set up their own operation.

 

Step 1

 

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/excise-duties-levies/apply-cannabis-licence.html

 

Keep in mind, the incumbent tabacco companies operating in the U.S. have to play the situation with a certain finesse due to the importance of the tobacco lobby. If they go off pioneering in a substance that isn't decriminalized nation wide, they run the risk of stepping offside politically which could quickly cost more than $2.4bln. Having an investment in a separate company is significantly different optically from building it internally, and in this case there's value to such separation.

 

My thought, all along, has been that Altria would wait until marijuana was removed from schedule 1 status for the very reason you mention.

 

I find it incredible that they'd take this risk & additionally, I find it incredibly stupid for them to pay so dearly for something that looks so crappy.

 

My comment about them starting their own operation was a sarcastic remark.

[orthopa]

They can't set up their own operation.

 

Step 1

 

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/excise-duties-levies/apply-cannabis-licence.html

 

Keep in mind, the incumbent tabacco companies operating in the U.S. have to play the situation with a certain finesse due to the importance of the tobacco lobby. If they go off pioneering in a substance that isn't decriminalized nation wide, they run the risk of stepping offside politically which could quickly cost more than $2.4bln. Having an investment in a separate company is significantly different optically from building it internally, and in this case there's value to such separation.

 

My thought, all along, has been that Altria would wait until marijuana was removed from schedule 1 status for the very reason you mention.

 

I find it incredible that they'd take this risk & additionally, I find it incredibly stupid for them to pay so dearly for something that looks so crappy.

 

My comment about them starting their own operation was a sarcastic remark.

 

I think if you wait for marijuana to come off sched 1 you waited to long not to mention dealing with the FDA with new products (which may happen anyway). How long have we been waiting on IQOS now?  Even though MO has been principally domestic I think for a while this will be a global story. 1st mover advantage has something to be said.  The price paid was high but this certainly has a long term time horizon. The purchase of UST for 10.8 B seemed a bit high in 2008 but smokeless has revenues ~2B a year now and growing with 65-70% margins.

 

Altria has a history of pretty successful acquisitions. UST, Kraft, SAB miller.  I couldnt find the financials at the time of take over but certainly some premium was involved. Probably not to the level of CRON though. Based on their track record I am comfortable if they are. 

 

https://www.nytimes.com/1988/10/31/business/kraft-being-sold-to-philip-morris-for-13.1-billion.html

 

https://www.reuters.com/article/us-ust/altria-to-buy-ust-for-10-4-billion-idUSBNG23930220080908

 

Interesting reading reuters article about declining smokers and subsequently looking at returns since.

[DooDiligence]

They can't set up their own operation.

 

Step 1

 

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/excise-duties-levies/apply-cannabis-licence.html

 

Keep in mind, the incumbent tabacco companies operating in the U.S. have to play the situation with a certain finesse due to the importance of the tobacco lobby. If they go off pioneering in a substance that isn't decriminalized nation wide, they run the risk of stepping offside politically which could quickly cost more than $2.4bln. Having an investment in a separate company is significantly different optically from building it internally, and in this case there's value to such separation.

 

My thought, all along, has been that Altria would wait until marijuana was removed from schedule 1 status for the very reason you mention.

 

I find it incredible that they'd take this risk & additionally, I find it incredibly stupid for them to pay so dearly for something that looks so crappy.

 

My comment about them starting their own operation was a sarcastic remark.

 

I think if you wait for marijuana to come off sched 1 you waited to long not to mention dealing with the FDA with new products (which may happen anyway). How long have we been waiting on IQOS now?  Even though MO has been principally domestic I think for a while this will be a global story. 1st mover advantage has something to be said.  The price paid was high but this certainly has a long term time horizon. The purchase of UST for 10.8 B seemed a bit high in 2008 but smokeless has revenues ~2B a year now and growing with 65-70% margins.

 

Altria has a history of pretty successful acquisitions. UST, Kraft, SAB miller.  I couldnt find the financials at the time of take over but certainly some premium was involved. Probably not to the level of CRON though. Based on their track record I am comfortable if they are. 

 

https://www.nytimes.com/1988/10/31/business/kraft-being-sold-to-philip-morris-for-13.1-billion.html

 

https://www.reuters.com/article/us-ust/altria-to-buy-ust-for-10-4-billion-idUSBNG23930220080908

 

Interesting reading reuters article about declining smokers and subsequently looking at returns since.

 

I owned UST at the time & was sad to have to sell the shares.

 

I didn't know as much as I do now about how to look at companies but felt like it was a great business at the time.

(FWIW, I barely know how to intelligently look at businesses now  :o )

 

My ability to develop insights is limited & I thank you & others for coddling me along  :)

 

What are your thoughts on internationalization?

A PM re-merger with Altria has been mentioned before.

[orthopa]

Well for one getting rid or eliminating e vapor products kills Juul and others that have invested much more time effort to extract that market segment. MO breaks even or loses money on e vapor/MarkTen products not to mention the contribution to revenue and eps is a rounding error.

 

Moving purchase age up has already been instituted in a couple states and has not affected volumes. Many people under the age of 18 smoke now same will happen if age is 21.

 

Menthol regulation is not unilateral on the FDAs part and could/will likely take years to institute. Lawsuits will come undoubtedly and those take a long long time. Secondly FDAs stance is to move away from combustible products in general so long term transition to nicotine delivery devices that are not combustible is what is going to happen and MO is ok with it. FDA says menthol e cigs still ok but combustible not. Secondly no mention of chew, move those people over to chew then also and infact MO has submitted MRP application for chew.

 

In mean time Altria kills competitors (who do you think lobbied FDA on Juul and teenage usage?)and moves nicotine lovers to a noncombustible option.  Its quite clear to alerted FDA to teen usage/flavors, etc. Altria is in FDAs back pocket.

 

Its my 3rd largest position, one Im most knowledgeable on and will add at 6% div yield.

 

Does today's WSJ article about Altria negotiating to buy a stake in Juul Labs make you question this thesis? It seems like a "if you can't kill em, join em" type scenario.

 

Personally, I think the Juul device is the genie that has come out of the vaping industry bottle. It's going to be an uphill battle for anyone to turn back the tide. Keep in mind that, as consumer tech, vaping device improvements will continue at a rapid pace. The vaping industry in the US is only ~10 years old!

 

I think it certainly is if you cant killem join em. For a couple reasons this would work out great for both companies.

1. With recent FDA regulations and Juul having to pull products and multiple flavors off the shelves valuation will certainly be lower. Recent funding valued it at ~12B last summer with sales thought to be 1.8-2B.  A couple billion being knocked off valuation not out of question now. The majority of Juul's volume was C store and going to be heavily curbed if FDA goes forward with strict flavor and point of sale restrictions. Juul advertised most on FB and instagram etc. Thats gone now.

2. Altria has the premium shelf space and tends to give the best margins to retailers so that gives Juul and instant in and with Marlboro name more incremental margin and introduces the product to the millions of 30+ year old smokers who are loyal to Marlboro.

3. MO has massive regulatory clout with FDA. With recent moves we see how much Juul has as recent FDA actions handcuffed them the most.

 

In the long run MO buys up new threat, Juul investors/owners get buyout and team up with most powerful player in industry. Ecigs/pods are MOs weakest segment.

 

Long run I bet we see MO go "smoke free" like PM has and will eventually sell "nicotine delivery devices". If this goes through this is a huge step towards it. If Juul backs down from deal then they essentially will have to fight the FDA and Altria side by side.  Not to mention PMTA applications are expensive like upwards of 100 million dollars expensive and no now one is better versed on regulation/lawsuits etc then Altria.  If you go back and look Altria voluntarily took all of their pod devices and flavors off of the  market before FDA statement. Saves face, makes them look like the good guy and more then willing as their volume is nil  while 100% of Juuls.

 

If $MO had "massive regulatory clout" with the FDA, Gottlieb wouldn't be pushing to ban menthol cigarettes. $MO has been clear that it does not want menthol cigs banned.

 

$PM hasn't gone "smoke free." While it has been the most proactive of the big tobacco companies in the next gen products space, the vast majority of its cash flow still comes from traditional combustible cigarettes. Whether $PM's IQOS will be a success outside of the Japanese and Korean markets is still a very open question.

 

Not sure I see the logic of MO not having regulatory clout and Gottlieb wanting to ban menthol. The FDA can want to do whatever it wants. The FDA has threatened to ban menthol every couple of years for the last 20 years. Whether or not it gets done is the issue.  I think the best example of regulatory clout is that fact that the US has no plain packaging and warnings that are minimal compared to other countries.

 

Secondly of course MO doesnt want menthol banned. Why would a company want 25% of their volume banned? Doesn't mean its going to happen or not happen over many years.  Key though will be whether non combustible menthol is banned in the final language of law. I assume you read the FDA treatment of menthol e cigs in the last FDA statement?  If final regulation spares non combustible nicotine then new objective over time lawsuit takes to run through is to switch consumers to menthol e cigs  ie Juul, green smoke and Mark Ten.

 

...And in to regards to PM..yes PM is going or at least trying to go smoke free. Their home page has the headline "Designing a smoke free future" for christ sakes.  My hope is at a minimum if one was going to discuss MO/PM they would at least have a basic understanding of what PM current sells in regards to combustible/IQOS/etc, ie im sure most are aware that the majority of PMs cash flow comes from combustible nicotine. I dont see where anyone says it didnt? ???

 

Oh lawd, here we go again.....

 

The whole point of having regulatory clout is that the regulator does (or doesn't do) what you want it to. In other words, the regulator serves to advance industry interests instead of the public interest. This is commonly known as "regulatory capture" in the economics literature. My point about menthol is that Big Tobacco has been very clear that it doesn't want menthol banned, and yet Scott Gottlieb is making a big push to do exactly that. I don't know how much more clear this can be.

 

Also, you seem to be unaware that the FDA gained much broader powers to regulate the tobacco industry when the 2009 Family Smoking Prevention and Tobacco Control Act was signed into law. Talking about what the FDA was or wasn't doing 20 years ago isn't as relevant as you seem to think it is.

 

https://en.wikipedia.org/wiki/Family_Smoking_Prevention_and_Tobacco_Control_Act

 

I'm not trying to be pedantic with all of this. My overall point is that the structure of the US cigarette industry is changing surprisingly quickly from a two company oligopoly to a vaping free-for-all. The profit pool for the latter is likely to be much smaller than the profit pool for the former.

 

At the risk of being pedantic can you be clear as to why you think Gottlieb would ban only combustible menthol and not vapor menthol if the FDA wanted menthol gone completely? Why leave vapor menthol?

 

If nicotine consumption is the endgame,brands are maintained or merged via PMTA and regulation, and you have a regulator motivated to get rid of combustibles how is the profit pool smaller?

[Foreign Tuffett]

Just got done skimming transcript of MO's Juul stake. Analysts asked some good, probing questions. Some brief thoughts:

 

- No path to control. So this is basically a giant VC investment. Also, $MO now owns two huge, illiquid assets ($BUD is the other)

 

- Juul is more-or-less a direct competitor to the forthcoming iQOS. It will be interesting to see how this plays out.

 

- So this is basically a bet that (1) Juul will continue its dominance in the US and (2) Juul will do well overseas. One issue is whether someone else will come up with a better vaping mouse trap that will, over time, displace Juul. Cigarette industry has historically had some unique dynamics that have significantly insulated existing brands from new entrants, but (as I've mentioned before) vaping is a different animal.   

 

CEO: "it does look like e-vapor has pushed the decline rate of cigarette at least in the past nine months up a bit."

 

https://seekingalpha.com/article/4229702-altria-group-inc-mo-ceo-howard-willard-discussion-investment-juul-labs-inc-conference-call?part=single

[frommi]

I have some mixed feelings over this deal. On the one hand i trust the management that the unit economics of losing a smoker and winning a JUUL customer even makes sense at a 35% ownership stake. JUUL pods have gross profit margins much higher than a pack of cigarettes because there are no taxes on them. In addition they get international growth which is a pretty huge and currently untapped market and JUUL has proven to be the #1 in vaping. Since vaping attracts a new set of smokers its possible that this is like buying a tobacco company in the 1950`s. In this light i can imagine that the money paid was worth it, especially since it was paid with cheap debt and the cashflows necessary for interest payments are there. JUUL has a lot of patents that protect their product for a long time, they have to make sure to build a number 1 brand here for the time after these run out and i think that Altria´s management can be an excellent help in this regard.

 

What i really don`t like is that there is no path or possibility to gain control of JUUL. What if JUUL decides that they want to enrich their own management or employees going forward instead of the nasty Tobacco giant? Is there a legal way to enforce dividend payments from JUUL with only some directors and a 35% stake?

[Spekulatius]

I have some mixed feelings over this deal. On the one hand i trust the management that the unit economics of losing a smoker and winning a JUUL customer even makes sense at a 35% ownership stake. JUUL pods have gross profit margins much higher than a pack of cigarettes because there are no taxes on them. In addition they get international growth which is a pretty huge and currently untapped market and JUUL has proven to be the #1 in vaping. Since vaping attracts a new set of smokers its possible that this is like buying a tobacco company in the 1950`s. In this light i can imagine that the money paid was worth it, especially since it was paid with cheap debt and the cashflows necessary for interest payments are there. JUUL has a lot of patents that protect their product for a long time, they have to make sure to build a number 1 brand here for the time after these run out and i think that Altria´s management can be an excellent help in this regard.

 

What i really don`t like is that there is no path or possibility to gain control of JUUL. What if JUUL decides that they want to enrich their own management or employees going forward instead of the nasty Tobacco giant? Is there a legal way to enforce dividend payments from JUUL with only some directors and a 35% stake?

 

Well, it’s a growth company, so dividends are a mute point. I do believe that over time any addition will get regulated and taxed. Replacing the nicotine in cigarettes with nicotine in vapes will not change that.

[frommi]

Well, it’s a growth company, so dividends are a mute point. I do believe that over time any addition will get regulated and taxed. Replacing the nicotine in cigarettes with nicotine in vapes will not change that.

 

Fine. Regulation helps the industry leaders and keeps competitors away. At some point Altria needs to tap JUUL`s cashflows, management said that they expect dividends after 2019 to come from JUUL so that idea is not from outer space.

[frommi]

This is from the Conference call:

 

Steve Powers

 

Understood, and I'll pass it on, but one final question about in terms of realizing the economics, or return on this investment. You have visibility to cash returns from this business in terms of any dividend commitment from Juul? Or is there an expected monetization event through IPO? At what point does this start contributing cash to Altria?

 

Howard Willard

 

I would say that in the next one or two years, I think the expectation is that there're going to be continuing to invest in capacity and in growth in both the U.S. and overseas, but the business becomes highly cash generative fairly quickly after that. And we would expect that there's the opportunity through dividends to receive cash from this investment and there's other potential opportunities as well.

 

So again, is there a legal way to enforce this or are they hoping on the goodwill of JUUL`s management here?

[Spekulatius]

This is from the Conference call:

 

Steve Powers

 

Understood, and I'll pass it on, but one final question about in terms of realizing the economics, or return on this investment. You have visibility to cash returns from this business in terms of any dividend commitment from Juul? Or is there an expected monetization event through IPO? At what point does this start contributing cash to Altria?

 

Howard Willard

 

I would say that in the next one or two years, I think the expectation is that there're going to be continuing to invest in capacity and in growth in both the U.S. and overseas, but the business becomes highly cash generative fairly quickly after that. And we would expect that there's the opportunity through dividends to receive cash from this investment and there's other potential opportunities as well.

 

So again, is there a legal way to enforce this or are they hoping on the goodwill of JUUL`s management here?

 

The dividend is decided by the companies board of directors. To the extend that MO can influence the decision, MO board representative can vote for  a dividend to be paid.

[Munger_Disciple]

I don't like this deal by Altria. Per WSJ report, Juul is distributing $2B back to existing shareholders out of the $12.8B cash paid by Altria for their 35% stake and valuation seems very stretched to me. So the $2B is not being used to improve Juul's business. I also don't understand why Juul won't have other competitors in the vaping space in the future and why their product is so unique. In my opinion, it is almost certain that vaping products will be taxed just like the current tobacco products in the not too distant future.

[Peregrino]

I was reading an article on Juul and its addictive properties.  In it, a high school student who had become addicted to them, mentioned that members of the high school football team were experiencing "Juul lung" and being winded during practice from using the product so much. 

 

That's pretty fast for symptoms to show up, or at least so I would think?  Doesn't it take years for smokers to have trouble breathing, develop the smoker's cough and that diner waitress voice?

 

Bottom line, the product hasn't been around all that long, so it's very hard to know what the long-term health consequences of it are. 

 

Cigarette companies could be walking back into the same thing that bit them in the 60's/70's. 

 

That said, the stocks have done incredibly well over that time with some serious headwinds, so perhaps this is just the cost of doing business. 

 

Question is, how accepting will the public and regulators be "the second time around" with a product that is a relatively recent creation and hadn't been part of the national economy since colonial times.

[Guest MarkS]

I don't like this deal by Altria. Per WSJ report, Juul is distributing $2B back to existing shareholders out of the $12.8B cash paid by Altria for their 35% stake and valuation seems very stretched to me. So the $2B is not being used to improve Juul's business. I also don't understand why Juul won't have other competitors in the vaping space in the future and why their product is so unique. In my opinion, it is almost certain that vaping products will be taxed just like the current tobacco products in the not too distant future.

 

Hi MungerDisciple

Juul has a lot of competition, companies like Smok, Geekvape, Aspire ... .  They also have competition from the various open device manufacturers and the various juice manufacturers.    Actually the market is made up of three broad categories cigalikes, pod products, like juul, and open systems.

[Peregrino]

I was reading an article on Juul and its addictive properties.  In it, a high school student who had become addicted to them, mentioned that members of the high school football team were experiencing "Juul lung" and being winded during practice from using the product so much. 

 

That's pretty fast for symptoms to show up, or at least so I would think?  Doesn't it take years for smokers to have trouble breathing, develop the smoker's cough and that diner waitress voice?

 

Bottom line, the product hasn't been around all that long, so it's very hard to know what the long-term health consequences of it are. 

 

Cigarette companies could be walking back into the same thing that bit them in the 60's/70's. 

 

That said, the stocks have done incredibly well over that time with some serious headwinds, so perhaps this is just the cost of doing business. 

 

Question is, how accepting will the public and regulators be "the second time around" with a product that is a relatively recent creation and hadn't been part of the national economy since colonial times.

 

 

Don't mind being upstaged by the likes of Malcolm Gladwell on a slightly different aspect of MO's strategy going forward...

 

https://www.newyorker.com/magazine/2019/01/14/is-marijuana-as-safe-as-we-think/amp

 

[LC]

Down 7% on aggressive FDA concerns:

https://finance.yahoo.com/news/fda-looking-nicotine-addicted-teens-140200378.html

 

 

[DooDiligence]

On top of that, 2 crappy looking investments by management.

 

This will probably turn out to be the stupidest purchase decision I've ever made besides OGX.

 

I'll compound the error by succumbing to the sunk cost fallacy & holding.

 

https://youarenotsosmart.com/2011/03/25/the-sunk-cost-fallacy/

[CONeal]

Down 7% on aggressive FDA concerns:

https://finance.yahoo.com/news/fda-looking-nicotine-addicted-teens-140200378.html

 

This is horse shit.  All they are doing is finding an issue and trying to invent a new drug.  If the FDA was really concerned about underage smoking, why don’t they put that amount of effort in stores that sell to minors.  After all, stores selling to minors is how this whole “epidemic” started.

 

Here you get carded if you look like your under 40.  Have a feeling the FDA concerns are more of a scare tatic for something else.

[frommi]

Altria`s marketcap has lost 28 billion in the last 2 months, so i would argue that JUUL is now valued at 0$. I think the reason for yesterday`s drop was this https://seekingalpha.com/news/3424575-morgan-stanley-warns-altria. I really like to know which oracle they use to forecast 6% volume declines. Two weeks ago another analyst forecasted 10% volume declines. Just shows how negative sentiment is with tobacco stocks. Reality is -4.5% right now, and when the FDA stops e-cigs, we will see 0% volume declines for the first time because the e-cig users will use normal cigs to get the nicotine fix. And if they just impose regulation on e-cigs, JUUL will be the winner because they now have the capital and know how to go through the regulatory process.

At these prices i think Altria is a very good investment, volume declines have to be above 6-7% (without people switching to JUUL/IQOS) for this not to be the case.

[DooDiligence]

Altria`s marketcap has lost 28 billion in the last 2 months, so i would argue that JUUL is now valued at 0$. I think the reason for yesterday`s drop was this https://seekingalpha.com/news/3424575-morgan-stanley-warns-altria. I really like to know which oracle they use to forecast 6% volume declines. Two weeks ago another analyst forecasted 10% volume declines. Just shows how negative sentiment is with tobacco stocks. Reality is -4.5% right now, and when the FDA stops e-cigs, we will see 0% volume declines for the first time because the e-cig users will use normal cigs to get the nicotine fix. And if they just impose regulation on e-cigs, JUUL will be the winner because they now have the capital and know how to go through the regulatory process.

At these prices i think Altria is a very good investment, volume declines have to be above 6-7% (without people switching to JUUL/IQOS) for this not to be the case.

 

I appreciate your thoughts & will use them to bolster my confirmation bias until I once again start ruminating over bearish ideas regarding what looks to me like some crappy capital allocation decisions.

 

If I've learned one thing from owning Altria, it's that you have to have a cast iron stomach when you invest in a company that sells products which kill people & significantly adds to healthcare costs (defense contractors notwithstanding.)

 

My idea was that they'd take all that fantastic free cash flow & continue to buy back shares as the ice cube melted & we'd wind up with a business that looked something like UST, which I had owned for quite a few years before they were purchased by Altria & also before tobacco litigation was settled (UST had minimal liability at the time & I slept like a baby during the entire lengthy process until my shares, which I didn't really want to sell, were purchased.)

 

Optionality included rolling up a fragmented MJ industry AFTER the fed removed it from schedule 1 status & NOT paying $1.8B for a 45% stake in a weed co that lost $7m on $10m in revenues over the previous 9 months.

 

I'm also not real happy about them pursuing an adjacent industry in vaping which I see as fraught with similar regulatory & civil litigation problems as cigs. Not to mention the exorbitant price paid for a minority stake which Altria seems to have negotiated from a position of weakness.

 

All of my thoughts are flights of fancy that have not been based on any kind of proprietary knowledge which leads to lesson number two & the need to change my username to something more appropriate like maybe pooDiligence.

[Sunrider]

Altria`s marketcap has lost 28 billion in the last 2 months, so i would argue that JUUL is now valued at 0$. I think the reason for yesterday`s drop was this https://seekingalpha.com/news/3424575-morgan-stanley-warns-altria. I really like to know which oracle they use to forecast 6% volume declines. Two weeks ago another analyst forecasted 10% volume declines. Just shows how negative sentiment is with tobacco stocks. Reality is -4.5% right now, and when the FDA stops e-cigs, we will see 0% volume declines for the first time because the e-cig users will use normal cigs to get the nicotine fix. And if they just impose regulation on e-cigs, JUUL will be the winner because they now have the capital and know how to go through the regulatory process.

At these prices i think Altria is a very good investment, volume declines have to be above 6-7% (without people switching to JUUL/IQOS) for this not to be the case.

 

I appreciate your thoughts & will use them to bolster my confirmation bias until I once again start ruminating over bearish ideas regarding what looks to me like some crappy capital allocation decisions.

 

If I've learned one thing from owning Altria, it's that you have to have a cast iron stomach when you invest in a company that sells products which kill people & significantly adds to healthcare costs (defense contractors notwithstanding.)

 

My idea was that they'd take all that fantastic free cash flow & continue to buy back shares as the ice cube melted & we'd wind up with a business that looked something like UST, which I had owned for quite a few years before they were purchased by Altria & also before tobacco litigation was settled (UST had minimal liability at the time & I slept like a baby during the entire lengthy process until my shares, which I didn't really want to sell, were purchased.)

 

Optionality included rolling up a fragmented MJ industry AFTER the fed removed it from schedule 1 status & NOT paying $1.8B for a 45% stake in a weed co that lost $7m on $10m in revenues over the previous 9 months.

 

I'm also not real happy about them pursuing an adjacent industry in vaping which I see as fraught with similar regulatory & civil litigation problems as cigs. Not to mention the exorbitant price paid for a minority stake which Altria seems to have negotiated from a position of weakness.

 

All of my thoughts are flights of fancy that have not been based on any kind of proprietary knowledge which leads to lesson number two & the need to change my username to something more appropriate like maybe pooDiligence.

 

yeah, I really wonder what these guys were thinking signing a check to buy a farmer with a commodity crop ... I mean, it really is as simple as that ... would they buy a tobacco farmer? Really makes you wonder how such mental lapses happen.

[Spekulatius]

^ These desperation moves are driven by managements desire to have a future ( something to do) rather than driven by the desire to drive shareholder value. Self preservation is a strong instinct for individuals ,but also organizations and companies.

[frommi]

Why not trust management here? Do they have a history of destroying shareholder value?

I can imagine that the numbers make sense, especially when you look out some years, but without knowing all calculations and assumptions how can you even assume that the management is incompetent? (Don`t forget that the money Altria invested didn`t go to someone else but is in large part invested at these companies with a high return on capital, at least when you subtract the capital that has gone to JUUL workers.)

[DooDiligence]

Why not trust management here? Do they have a history of destroying shareholder value?

I can imagine that the numbers make sense, especially when you look out some years, but without knowing all calculations and assumptions how can you even assume that the management is incompetent? (Don`t forget that the money Altria invested didn`t go to someone else but is in large part invested at these companies with a high return on capital, at least when you subtract the capital that has gone to JUUL workers.)

 

How much more in revenues & earnings & FCF has Chronos produced since the investment in their business?

They would have to be astronomically high figures in comparison to their miserable performance pre-investment.

Management would answer this by saying "it's been less than a month" to which I say "bollocks".

Where is the plan outlining exactly how they are going to build the colossal business this investment would require?

 

What are we getting from Juul as a result of the investment besides a ton of risk?

 

I agree with Spek & it disturbs me that management & the BOD are incapable of seeing that by sticking to their knitting & shrinking the equity base they will produce value.

 

A business doesn't HAVE to grow to create value, if the cash is deployed well.

 

I fully expect to see nice fat pay increases for management on the next proxy.

[DooDiligence]

Altria`s marketcap has lost 28 billion in the last 2 months, so i would argue that JUUL is now valued at 0$. I think the reason for yesterday`s drop was this https://seekingalpha.com/news/3424575-morgan-stanley-warns-altria. I really like to know which oracle they use to forecast 6% volume declines. Two weeks ago another analyst forecasted 10% volume declines. Just shows how negative sentiment is with tobacco stocks. Reality is -4.5% right now, and when the FDA stops e-cigs, we will see 0% volume declines for the first time because the e-cig users will use normal cigs to get the nicotine fix. And if they just impose regulation on e-cigs, JUUL will be the winner because they now have the capital and know how to go through the regulatory process.

At these prices i think Altria is a very good investment, volume declines have to be above 6-7% (without people switching to JUUL/IQOS) for this not to be the case.

 

I appreciate your thoughts & will use them to bolster my confirmation bias until I once again start ruminating over bearish ideas regarding what looks to me like some crappy capital allocation decisions.

 

If I've learned one thing from owning Altria, it's that you have to have a cast iron stomach when you invest in a company that sells products which kill people & significantly adds to healthcare costs (defense contractors notwithstanding.)

 

My idea was that they'd take all that fantastic free cash flow & continue to buy back shares as the ice cube melted & we'd wind up with a business that looked something like UST, which I had owned for quite a few years before they were purchased by Altria & also before tobacco litigation was settled (UST had minimal liability at the time & I slept like a baby during the entire lengthy process until my shares, which I didn't really want to sell, were purchased.)

 

Optionality included rolling up a fragmented MJ industry AFTER the fed removed it from schedule 1 status & NOT paying $1.8B for a 45% stake in a weed co that lost $7m on $10m in revenues over the previous 9 months.

 

I'm also not real happy about them pursuing an adjacent industry in vaping which I see as fraught with similar regulatory & civil litigation problems as cigs. Not to mention the exorbitant price paid for a minority stake which Altria seems to have negotiated from a position of weakness.

 

All of my thoughts are flights of fancy that have not been based on any kind of proprietary knowledge which leads to lesson number two & the need to change my username to something more appropriate like maybe pooDiligence.

 

yeah, I really wonder what these guys were thinking signing a check to buy a farmer with a commodity crop ... I mean, it really is as simple as that ... would they buy a tobacco farmer? Really makes you wonder how such mental lapses happen.

 

Hubris combined with stupidity.