MO - Altria Corp

[DooDiligence]

Once again, I believe Howard Willard & the BOD are idiots.

 

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re: Chronos

 

"The company urged investors to focus on an “adjusted Ebitda” number, representing earnings before interest, taxes, depreciation, and amortization, with some one-time charges removed."

 

Of course they said that...

 

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"Among its quarterly accomplishments, Cronos pointed to the receipt of the cash from the Altria deal, some management hires, and progress in building greenhouses in Ontario and Israel. It expects to complete construction on the projects in the second half of this year. Israel will allow producers of marijuana to export the product for medical use."

 

That ought to move the needle  :o

 

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https://www.barrons.com/articles/marijuana-grower-cronos-pot-sales-earnings-weak-51557408137

[mwtorock]

These guys are raising prices like nothing before. it would either prove that they have super strong pricing power, or they are desperate to make their numbers for the year.

[Foreign Tuffett]

These guys are raising prices like nothing before. it would either prove that they have super strong pricing power, or they are desperate to make their numbers for the year.

 

MO is trying to compensate for accelerating volume declines by jacking the price up on aging smokers who are too set in their ways to ever switch from conventional cigarettes to vaping.

[DooDiligence]

These guys are raising prices like nothing before. it would either prove that they have super strong pricing power, or they are desperate to make their numbers for the year.

 

MO is trying to compensate for accelerating volume declines by jacking the price up on aging smokers who are too set in their ways to ever switch from conventional cigarettes to vaping.

 

Gotta show something so shareholders don't get up in arms over the big comp packages coming in the wake of their "masters of the universe" investment activity this year.

[DooDiligence]

WT everloving F?

 

https://www.benzinga.com/analyst-ratings/analyst-color/19/08/14202055/analyst-cronos-redwood-deal-just-the-tip-of-the-iceberg

[kab60]

I'm trying to figure out why this isn't a really fat pitch.

 

Apart from killing your customers, tobacco has probably been the best business in the world. Massive regulation (like no advertising) has given brands like Marlboro extreme pricing power. It means one is able to earn crazy returns on a commodity product and increase margins though volumens are falling.

 

There's a lot of focus on vaping, but if vaping gets banned (and Altrias investment is JUUL is impaired), I'm not even sure that's a negative in that some vapors will have to resort to tobacco? Vaping or no vaping, Altria is and continues to believe it will earn a boatload of money from cigarettes going forward.

 

What's the worst case here? Volumens fall off a cliff, and pricing won't be able to make up for it? We're already at a PE of 10. For a Company selling a product with pricing power that people are addicted to.

 

I agree JUUL and Chronos looks somewhat sketchy, but on the other hand it means the Company has somewhat hedged its future. And any way, this business is so simple, that even an idiot should be able to run it (and some would say someone already is).

[gurpaul88]

What's the worst case here? Volumes fall off a cliff, and pricing won't be able to make up for it?

 

This is it right here. And the belief that it is accelerating.

[kab60]

What's the worst case here? Volumes fall off a cliff, and pricing won't be able to make up for it?

 

This is it right here. And the belief that it is accelerating.

But shouldn't they be pretty well hedged between IQOS and Juul if that happens? It just seems there's a massive discrepancy between the valuation and what management are expecting. They still seem to think they can grow EPS 7-9 pct. longterm in a business with little need for incremental capital. At the same time it's trading at a bit below 10 times earnings - as if it growth completely stalls from here.

 

This time might be different, but it seems every other time investors have run away from tobacco they left money on the table. At these levels 40 pct. of ones investment would be recouped in five years in dividens alone (and that is if one leaves the dividend alone - they've raised it 50 years in a row or something like that). Say they actually deliver what they expect it's easy to see a solid double digit annual return between earnings, growth and a bit of multiple expansion. And even if they don't you could probably do okay.

[Spekulatius]

I doubt that Vaping gets banned, but it will get regulated. We do not know what the economics of thr vaping or IAOS business going forward will look like. Tobacco has been a great business but never before has been a better substitute for Tobacco been around, so I think this time is different.

[frommi]

I doubt that Vaping gets banned, but it will get regulated. We do not know what the economics of thr vaping or IAOS business going forward will look like. Tobacco has been a great business but never before has been a better substitute for Tobacco been around, so I think this time is different.

 

At least for IQOS you can look at the PM annual report to get an idea of it. Because of lower taxes on IQOS they earn more on every stick sold than on cigarettes (And thats true even with a lower selling price). The devices are sold without profits, and i expect that production of HEET`s is similar to cigarette production. This is an excellent business and the reason PM is pushing it so hard.

Vaping might be not so profitable because of all the competition, but this is probably going to get better with more regulation.

I see it as a fat pitch right now. Just compare it to other staples like KO,KHC or something like GIS (which also sell unhealthy and volume shrinking products but with price competition) that trade at higher multiples and it is obvious that Altria/PM is a much better investment.

 

*EDIT*: Just to give some numbers, 5.5% of stick volume for PM was from IQOS/RRP, while 15% of net revenues (after excise taxes) came from IQOS/RRP. Even if half of RRP revenue was devices, this is >30% more net revenue on every HEET stick. Given that HEETS are pretty similar to cigarettes, i would think that costs to manufacture them are also similar.

*EDIT2*: And it gets even better when you look at the latest quarter, where 14% of revenue was devices and RRP revenue was already 20% of the whole. Unit economics on HEETs are great and PM even stated in the earnings call that margins will expand. Just look at page 43 of the call presentation and you see that adjusted operating margins have increased by 2.4% over one year.

[Castanza]

I doubt that Vaping gets banned, but it will get regulated. We do not know what the economics of thr vaping or IAOS business going forward will look like. Tobacco has been a great business but never before has been a better substitute for Tobacco been around, so I think this time is different.

 

My question is what are they going to regulate? It seems like they will simply put an official label on what already exists. Correct me if I'm wrong but weren't the overwhelming majority of deaths caused by illegal products? What would the FDA even say? I can't picture them coming out and saying "vaping is safer than smoking." As that would simply drive sales and some people would take that as "this is kind of healthy". It really just seems like they want their federal tax money and that's it.

[mwtorock]

I doubt that Vaping gets banned, but it will get regulated. We do not know what the economics of thr vaping or IAOS business going forward will look like. Tobacco has been a great business but never before has been a better substitute for Tobacco been around, so I think this time is different.

 

At least for IQOS you can look at the PM annual report to get an idea of it. Because of lower taxes on IQOS they earn more on every stick sold than on cigarettes (And thats true even with a lower selling price). The devices are sold without profits, and i expect that production of HEET`s is similar to cigarette production. This is an excellent business and the reason PM is pushing it so hard.

Vaping might be not so profitable because of all the competition, but this is probably going to get better with more regulation.

I see it as a fat pitch right now. Just compare it to other staples like KO,KHC or something like GIS (which also sell unhealthy and volume shrinking products but with price competition) that trade at higher multiples and it is obvious that Altria/PM is a much better investment.

 

*EDIT*: Just to give some numbers, 5.5% of stick volume for PM was from IQOS/RRP, while 15% of net revenues (after excise taxes) came from IQOS/RRP. Even if half of RRP revenue was devices, this is >30% more net revenue on every HEET stick. Given that HEETS are pretty similar to cigarettes, i would think that costs to manufacture them are also similar.

*EDIT2*: And it gets even better when you look at the latest quarter, where 14% of revenue was devices and RRP revenue was already 20% of the whole. Unit economics on HEETs are great and PM even stated in the earnings call that margins will expand. Just look at page 43 of the call presentation and you see that adjusted operating margins have increased by 2.4% over one year.

 

It seems that IQOS/RRP probably needs perpetual investments to drive sales, including frequent product updates. It could be a lower operating margin business than the cigarettes? Maybe just for the early stage of product adoption.

[frommi]

The question for MO in regard to IQOS over the past year for me was just how much of the IQOS profits really get to Altria and how much as a license fee to PM. There was never a public statement of the exact split. I think that they were probably still negotiating this and Altria played its card by not rolling out IQOS very fast and PM`s answer was than to take over Altria to eliminate this licensing mess. It would have been great if IQOS was available nationwide in the US right now, because all this fear of vaping plays directly into the cards of PM/MO.

 

I can imagine that we even see an uptick in tobacco usage this quarter because people switch from vaping back to cigarettes with all these scary headlines thinking that vaping is more dangerous than cigs.

 

It seems that IQOS/RRP probably needs perpetual investments to drive sales, including frequent product updates. It could be a lower operating margin business than the cigarettes? Maybe just for the early stage of product adoption.

 

Than why are margins already expanding even with the introduction of IQOS 3 and all these investments?

[mwtorock]

IQOS first launched in Japan/East Asia and had a huge success for PM with annual revenue north of 3B in 2017 if I remember correctly. Then in 2H 2018 IQOS lost some market share or did not gain as much in the same markets (Japan and Korea). PM started putting more investments behind IQOS/HEETs there including new products launches after that, and i think they are seeing stabilization in terms of market share/growth. PM management talked about more investments later this year too with 2020 in mind, so it looks like a lot of investments are required at this age and it did show EBIT margin impact on PM statements.

 

However, it could be totally different from MO's angle. It really depends on how the split works on IQOS/HEETs between the two.

[Casey]

It really seems like a heads I win, tails you lose situation to me.

 

Either vaping is banned or severely limited in U.S. by new laws and some percentage of burgeoning vape population switches to cigs/tobacco. Volume declines slow.

 

Or..

 

Vaping is not banned and then MO owns 30% of JUUL. Which should do okay.

 

People will learn from this media episode that it is better to buy your vape from legit and verified sources, and not from sketchy or unknown ones, and regulation will also doubly enforce that point. Which would seem to favor JUUL as well.

 

I suppose a third possible dynamic is that vaping is banned, but people don't switch to tobacco and keep using bootleg versions (Which i think are the cause of recent health issues). And so vaping reputation keeps getting worse in a negatively reinforcing spiral of regulation and use of unsafe bootleg vapes + sensational media coverage.

 

(long MO, PM, BTI)

[no_free_lunch]

I'm thinking the same Casey. I imagine there will be some declines from a vape ban, I don't think it will be fully offset but it will be ok.  We are talking nicotine, it's hyper addictive.  If you take away one source then people move to another.

[Spekulatius]

I doubt that Vaping gets banned, but it will get regulated. We do not know what the economics of thr vaping or IAOS business going forward will look like. Tobacco has been a great business but never before has been a better substitute for Tobacco been around, so I think this time is different.

 

My question is what are they going to regulate? It seems like they will simply put an official label on what already exists. Correct me if I'm wrong but weren't the overwhelming majority of deaths caused by illegal products? What would the FDA even say? I can't picture them coming out and saying "vaping is safer than smoking." As that would simply drive sales and some people would take that as "this is kind of healthy". It really just seems like they want their federal tax money and that's it.

 

Taxes and how they are being sold. I do know honk that vaping is safer than smoking, because it’s the byproducts of smoking that is causing lung disease and cancer, not the nicotine. I agree the death are caused by illegal products. What we don’t know is how profitable vaping is going to be, as new entrants have been taking market share (JUUL). I know that JUUL is 30% owned by MO (for a steep price), but 30% might not be enough to offset the market share losses, although it’s better than nothing. And then there is capital misallocation risk when you look at the purchase of their Cronos share for an insane price.

[Foreign Tuffett]

As I think my earlier posts in this thread demonstrate, I've been bearish on MO and tobacco in general. I do think the stock is much more interesting now @ $40 than it was @ $60 or $70. Furthermore, I think the rapidly increasing likelihood that we are going to see more regulations on vaping in the near future is good for "Big Tobacco."

 

Big Tobacco needs vaping to be tightly regulated. Tight regulation will weed out the small players and hopefully give the big players like Juul and BTI's Vuse some pricing power.

 

The worst case scenario is one in which vaping remains largely unregulated, which would force Big Tobacco to compete on device and pod pricing. On the last MO call an analyst pointedly referenced the current lack of pricing power in the vaping space ("e-cigarettes they aren't really taking any pricing and they haven't taken any pricing for two years"). Big Tobacco has thrived for decades precisely because it has been largely insulated from price competition. The absolute last thing it wants to do is compete on price with every last Tom, Dick, and Harry who decides to enter the vaping space.

 

One last thought: The market may very well "lose its shit" in the face of regulation, just like it did after the Master Settlement. However, the most important thing is the long term structure of the industry, even if that means temporary pain.

 

 

* Edited to add last paragraph

[no_free_lunch]

90% of their revenue is from traditional cigarettes and only 10% from vaping.  The stock is down 10% so the market has already wiped out the vaping division.  It seems overdone.

 

My main concern is management's capital allocation.  They do seem to overpay and they seem to trend follow.

[Spekulatius]

As I think my earlier posts in this thread demonstrate, I've been bearish on MO and tobacco in general. I do think the stock is much more interesting now @ $40 than it was @ $60 or $70. Furthermore, I think the rapidly increasing likelihood that we are going to see more regulations on vaping in the near future is good for "Big Tobacco."

 

Big Tobacco needs vaping to be tightly regulated. Tight regulation will weed out the small players and hopefully give the big players like Juul and BTI's Vuse some pricing power.

 

The worst case scenario is one in which vaping remains largely unregulated, which would force Big Tobacco to compete on device and pod pricing. On the last MO call an analyst pointedly referenced the current lack of pricing power in the vaping space ("e-cigarettes they aren't really taking any pricing and they haven't taken any pricing for two years"). Big Tobacco has thrived for decades precisely because it has been largely insulated from price competition. The absolute last thing it wants to do is compete on price with every last Tom, Dick, and Harry who decides to enter the vaping space.

 

One last thought: The market may very well "lose its shit" in the face of regulation, just like it did after the Master Settlement. However, the most important thing is the long term structure of the industry, even if that means temporary pain.

 

 

* Edited to add last paragraph

 

I agree that big tobacco (or nicotine) will only thrive with regulation. The worst possible outcome is that vaping becomes an business where free markets reign, with lots of players and prices drop to levels in commodity industries and this vaping products  then suck market share from regular and higher priced and taxed cigarettes. That’s the doomsday scenario, not tight regulation. It seems to me that the cannabis industry is heading this way. For the nicotine industry, I believe the most likely outcome is that the tobacco tax morphs into a system of nicotine tax and regulation. If I were sure about this, I should probably buy MO.

 

 

[DooDiligence]

I owned UST, decades ago, and watched it languish during the tobacco litigation era.

 

I kept adding to it & eventually made out well with dividend reinvestment & the Altria buyout.

 

I think Altria will languish with all the constant bad industry news & Willard will continue doing dumb things with our money. Then the market will get all abuzz about MJ and a promotional management team will push the hype in a crowded field.

 

If this happens, I'll cut my shares loose & thank my lucky stars.

[LC]

Merger talks ended:

https://finance.yahoo.com/news/philip-morris-altria-end-merger-114503689.html

 

PM up premaket

 

 

Juul CEO steps down, JUUL suspends all advertising

https://finance.yahoo.com/m/438db1d7-1e3a-3525-9a9a-aea26dbbcbce/juul-labs-ceo-steps-down%3B.html

 

Philip Morris and Altria, announcing the end of their talks, said they would instead focus on the joint launch of tobacco-heating product iQOS in the United States.

 

 

[DooDiligence]

Merger talks ended:

https://finance.yahoo.com/news/philip-morris-altria-end-merger-114503689.html

 

PM up premaket

 

 

Juul CEO steps down, JUUL suspends all advertising

https://finance.yahoo.com/m/438db1d7-1e3a-3525-9a9a-aea26dbbcbce/juul-labs-ceo-steps-down%3B.html

 

Philip Morris and Altria, announcing the end of their talks, said they would instead focus on the joint launch of tobacco-heating product iQOS in the United States.

 

Weren’t the talks between Altria & Juul kind of contentious to begin with?

 

Looks like a hostile takeover of Juul without a shot fired (unless you consider that $13B cannonball).

 

They would have been in a significantly better position if PM & MO would’ve merged 1st & then taken out Juul.

 

I’m guessing the PM + MO thing has broken down because Willard doesn’t want to be 2nd fiddle.

[kab60]

I think it's playing out pretty well for Altria. Current vaping headwinds could help them out longer term, and there is some optionality in IQOS or gaining control of JUUL and running it like it's supposed to be done in this space. Went long.

[gokou3]

Just got long today as well.  The lost in market cap since the Juul deal announcement is more than the $12.8B price paid, so I am happy to enter a position at this time even if there is a write-down of Juul.