PM - Philip Morris International

[Spekulatius]

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.

[orthopa]

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.

 

 

[Foreign Tuffett]

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]

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]

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.

[orthopa]

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.

 

A price war could certiainly hurt alot of e cigarette and vaping competition and the FDA surely can help too.  What about M&A? The tobacco lobby as much as it has been hurt by the FDA will also be helped. I would predict a large amount of e cig competition is regulated away. Did you see the latest warning from FDA regarding JUUL?

 

When thinking about the e vapor business now and how big it is relative to the traditional tobacco business a margin war would be perfect for Altria. In 20 years does big tobacco want to be in a competitive business with other start ups when traditional tobacco is a small amount of what is consumed? No way, as you say it would kill the investment thesis but on one hand you cant say horrible margins would not kill competitors over time.  As I mentioned previously changing tastes and nicotine delivery changes would be a killer for these companies too. Tobacco preference over time has changed from just a couple of years ago from e cigs, to mods, and now pods.

 

What about new taxation laws on reduced risk products, e cigs etc? What about a mandatory reduced risk designation in time? Do you think these competitors come up with the cash to apply and do all necessary testing? Maybe but it will be a big nut for sure.

 

Big tobacco right now is at the mercy of changing tastes from the consumer but best equipped to follow the trend for now. It will be impossible to predict trends along the way. 

[fareastwarriors]

Philip Morris International confirms it’s in merger talks with Altria

 

https://www.cnbc.com/2019/08/27/philip-morris-international-confirms-its-in-merger-talks-with-altria.html

[obtuse_investor]

For two companies that can provide no assurances on a successful alliance, certainly have lawyers who are collaborating very closely.

 

PM

 

August 27, 2019—New York, New York—Philip Morris International Inc. (NYSE: PM) today announced that it is in discussions with Altria Group, Inc. (NYSE: MO) regarding a potential all-stock, merger of equals.There can be no assurance that any agreement or transaction will result from these discussions. Additionally, there can be no assurance that if an agreement is reached, that a transaction will be completed.Any transaction would be subject to the approval of the two companies’ boards and shareholders, and regulators, as well as other conditions.Philip Morris International intends to make no further comment regarding the discussions unless and until it is appropriate to do so.

 

MO

 

Richmond, VA - Altria Group, Inc. (Altria) (NYSE: MO) today announced that it is in discussions with Philip Morris International, Inc. (NYSE: PM) regarding a potential all-stock, merger of equals. There can be no assurance that any agreement or transaction will result from these discussions. Additionally, there can be no assurance that if an agreement is reached, that a transaction will be completed.  Any transaction would be subject to the approval of the two companies’ boards and shareholders, and regulators, as well as other conditions.  Altria intends to make no further comment regarding the discussions unless and until it is appropriate to do so.

[Munger_Disciple]

Looks like they are already benefiting from "synergies": one lawyer drafting both the press releases  ::)

[DooDiligence]

Looks like they are already benefiting from "synergies": one lawyer drafting both the press releases    ::).

 

I'm convinced the C-suites for all these businesses are full of fools.

 

I'm not interested in receiving PM shares in exchange either.

 

I just want cash from a greater fool.

[3259]

For those who have been following PM, does it make sense to reunite it with MO?  It seems like one of pm’s largest headwinds in recent years has been currency issues; however, I like the idea of using it to offset my US centric investments.  Does the combination make PM more or less attractive to you?  I’m currently on the fence, leaning toward less interested, but am seeking input from those with more knowledge of pm and no.

 

Are there any benefits to combo  outside of combining head office, the new company having total control of pm’s noncombustible products in US market, and smoothing our currency issues?

[DooDiligence]

For those who have been following PM, does it make sense to reunite it with MO?  It seems like one of pm’s largest headwinds in recent years has been currency issues; however, I like the idea of using it to offset my US centric investments.  Does the combination make PM more or less attractive to you?  I’m currently on the fence, leaning toward less interested, but am seeking input from those with more knowledge of pm and no.

 

Are there any benefits to combo  outside of combining head office, the new company having total control of pm’s noncombustible products in US market, and smoothing our currency issues?

 

Should obfuscate the financial statements enough so that the eventual impairment of goodwill from the Juul & Chronos cash burns will be easier to sweep under the rug.

 

Also a net positive for C-Suite comp packages.

[frommi]

If PM is 58% of the combined company as is rumored i would argue that PM got a good deal, because they got Altria very cheap. I would be very happy if Altria`s management team is leaving and they spinoff or sell the JUUL and BUD stake as long as its valuable (JUUL was worth 20% more than Altria paid in the latest financing round if i recall that correctly or the rumors were right).

The problem right now is that Altria has no clear incentive to sell IQOS in the US market, because a lot of the profits will go to PM via the licensing agreement. With the combined company thats not a problem anymore. I currently own a 20% position in the combination with half being in MO and half in PM, which is the biggest position i ever had in any company. At least here in europe its openly visible that IQOS is the future of smoking.

[NBL0303]

 

Should obfuscate the financial statements enough so that the eventual impairment of goodwill from the Juul & Chronos cash burns will be easier to sweep under the rug.

 

 

Is Juul not working out well for them? I'd love some color on that if you're interested in providing any, I don't know anything about it and it is an interesting subject.

[StubbleJumper]

For those who have been following PM, does it make sense to reunite it with MO?  It seems like one of pm’s largest headwinds in recent years has been currency issues; however, I like the idea of using it to offset my US centric investments.  Does the combination make PM more or less attractive to you?  I’m currently on the fence, leaning toward less interested, but am seeking input from those with more knowledge of pm and no.

 

Are there any benefits to combo  outside of combining head office, the new company having total control of pm’s noncombustible products in US market, and smoothing our currency issues?

 

 

Wasn't the company split into two in an effort to insulate the international business from the risk of litigation originating in the US business?  That logic always made perfect sense to me because there is always an outside risk that some lawsuit in the US ends up being so large that MO goes bankrupt, while the absence of punitive damages in most other countries means that PM is unlikely to face insolvency due to litigation.

 

So, has the legal landscape changed since the spinoff?  Or is it the case that there is still a compelling reason to have two separate entities?

 

 

SJ

[Castanza]

 

Should obfuscate the financial statements enough so that the eventual impairment of goodwill from the Juul & Chronos cash burns will be easier to sweep under the rug.

 

 

Is Juul not working out well for them? I'd love some color on that if you're interested in providing any, I don't know anything about it and it is an interesting subject.

 

I think it's the threat of government more so than the consumer demand. Can't remember his name but one congressman has already said he will introduce legislation to ban Juul if the usage rates don't drop among teens. They already banned the top three flavors teens were purchasing. It's amazing really. Here we are trying to legalize weed (unfiltered smoke) and also trying to ban vap devices.

[Castanza]

If PM is 58% of the combined company as is rumored i would argue that PM got a good deal, because they got Altria very cheap. I would be very happy if Altria`s management team is leaving and they spinoff or sell the JUUL and BUD stake as long as its valuable (JUUL was worth 20% more than Altria paid in the latest financing round if i recall that correctly or the rumors were right).

The problem right now is that Altria has no clear incentive to sell IQOS in the US market, because a lot of the profits will go to PM via the licensing agreement. With the combined company thats not a problem anymore. I currently own a 20% position in the combination with half being in MO and half in PM, which is the biggest position i ever had in any company. At least here in europe its openly visible that IQOS is the future of smoking.

 

Any thoughts on what the share price of MO will be when the merger happens? I've seen math suggesting anything from $42 (can't imagine shareholders approving that) to $52.

[frommi]

Any thoughts on what the share price of MO will be when the merger happens? I've seen math suggesting anything from $42 (can't imagine shareholders approving that) to $52.

 

If my math is correct the market has already priced in the 58% PM/42%MO split (based on marketcap) and it doesn`t matter which one you buy right now. (74.5$ PM/ ~45$ MO)

[DooDiligence]

 

Should obfuscate the financial statements enough so that the eventual impairment of goodwill from the Juul & Chronos cash burns will be easier to sweep under the rug.

 

 

Is Juul not working out well for them? I'd love some color on that if you're interested in providing any, I don't know anything about it and it is an interesting subject.

 

I think it's the threat of government more so than the consumer demand. Can't remember his name but one congressman has already said he will introduce legislation to ban Juul if the usage rates don't drop among teens. They already banned the top three flavors teens were purchasing. It's amazing really. Here we are trying to legalize weed (unfiltered smoke) and also trying to ban vap devices.

 

Civil suits over marketing to minors along with similar over health risks (which I expect to pick up as the decade rolls on) + the fact that they are selling an item which is addictive in order to replace an item that is addictive.

 

People have often said that you'd have to be an idiot to not know that cigarettes are bad for you & I submit that the same argument goes for vaping.

 

I also believe they chose poorly in MJ.

 

https://www.bloomberg.com/news/articles/2019-08-02/cronos-is-said-to-near-300-million-deal-for-owner-of-lord-jones

[orthopa]

I had owned these two for 11 years and sold both positions over the last year. Currently both are looking rather cheap and lower then what I sold at which has peaked my interest again. I like to think I know these 2 business better then anything else I have ever invested in. What has had me concerned espescially with Altria has be the decreasing volumes which have really increased over the past couple of quarters. The assumption is this is going to Juul/vaping which is probably the case but MO ditched the MarkTen brand and is now only getting 35% of that old business now. Secondly of course the regulatory overhang is a concern. If "they" go after Juul really hard and for some reason the product is curtailed significantly or banned (unlikely) MO has a real problem. The BUD stake was a huge hidden asset for some time and now seems to have turned into a much slower growing business which is less attractive.

 

PMs issue for 5-6 years now has been FX and although that tide will change has severely impacted earnings, valuation and the div. IQOS seems like the future but outside of Japan growth has been very slow.

 

One of my other reasons and my own fault was owned these 2 in a taxable account which became very inefficient for building capital when the bill for the dividends came at tax time. I think longer term you can expect a ~8% growth out of MO and in fact I think management will make this happen via price increases. PM if fx issues ever abate may get you at 10-11% return but still a lot of ifs for both.

 

As far as them combining they are essentially the same business MO gets IQOS, PM gets more FX stability and the cash flow combination helps debt. Not much else to expect IMO unless PM feels like Juul is going to be a blockbuster world wide.

[frommi]

PMs issue for 5-6 years now has been FX and although that tide will change has severely impacted earnings, valuation and the div. IQOS seems like the future but outside of Japan growth has been very slow.

 

IQOS is growing very fast right now in europe (started last Q) and i see it everywhere. Especially in the supermarkets HEETs are placed next to cigarettes and you can see that its price is slightly lower than the price of a pack of cigarettes from discount brands. Thats where i think PM will gain market share because they don`t have a real competitor. You can`t buy BTI`s product or JUUL`s in a supermarket right now, only in smoking stores or  gas stations and even there IQOS is in the front and you have to turn around to see the others. At least in the stores that i visited.

 

8% growth + 6.5% dividend + 40-50% discount to fair value = >20% annual returns for the next 5 years.

 

JUUL is just <10% of the combined PM based on what Altria paid, so i don`t think it matters much in the long run, since its growth is already slowing down.

[orthopa]

PMs issue for 5-6 years now has been FX and although that tide will change has severely impacted earnings, valuation and the div. IQOS seems like the future but outside of Japan growth has been very slow.

 

IQOS is growing very fast right now in europe (started last Q) and i see it everywhere. Especially in the supermarkets HEETs are placed next to cigarettes and you can see that its price is slightly lower than the price of a pack of cigarettes from discount brands. Thats where i think PM will gain market share because they don`t have a real competitor. You can`t buy BTI`s product or JUUL`s in a supermarket right now, only in smoking stores or  gas stations and even there IQOS is in the front and you have to turn around to see the others. At least in the stores that i visited.

 

8% growth + 6.5% dividend + 40-50% discount to fair value = >20% annual returns for the next 5 years.

 

JUUL is just <10% of the combined PM based on what Altria paid, so i don`t think it matters much in the long run, since its growth is already slowing down.

 

Yeah growing "fast" but in many parts of the EU they have 3-4-5% of the market after being in the market for 2-3 years. Going from 1%-2% is growing 100% but its still only 2% of the market. This is happening while combustible volumes are decreasing so net net your hoping new smokers are converted or pricing makes up for it in the long run. Devices may eventually be a small revenue stream but they lose money on every device now.

 

What also has started to become much more of an issue is the taxing by local governments. Look at Saudi Arabia as an example volumes dropped 40% a year ago due to a large tax increase. There have been more and more of those creeping up.

 

I had the same investing reasoning/calculation that you did in 2012, 2013, 2014, 2015, 2016, 2017, and 2018 and look where we are. These are great income/preservation of capital stocks. I think to expect exceptional growth out of these is a bit of a stretch.

[frommi]

Yes, the device cost is a problem, but look how well the income statement still looks despite all these front-up costs. I can imagine that they earn more on HEET`s than on cigarettes despite HEET`s being a lot cheaper because of taxes. And 10 years from now IQOS will be at 20-30% of PM`s business when they can keep up the current growth pace. And while volume goes down, costs also go down. Altria is a prime example of how good this can be for shareholders. The market is simply irrational about these stocks right now, because "tobacco is a dying business".

 

And on the other hand you have TSLA or BYND on exuberant prices with commodity businesses that have zero pricing power. 10 years from now there will still be a lot of smokers, but i doubt that TSLA cars are still on the road or that a lot of people still eat unhealthy vegetable burgers. But maybe i am just the irrational guy.

[peterHK]

Yes, the device cost is a problem, but look how well the income statement still looks despite all these front-up costs. I can imagine that they earn more on HEET`s than on cigarettes despite HEET`s being a lot cheaper because of taxes. And 10 years from now IQOS will be at 20-30% of PM`s business when they can keep up the current growth pace. And while volume goes down, costs also go down. Altria is a prime example of how good this can be for shareholders. The market is simply irrational about these stocks right now, because "tobacco is a dying business".

 

And on the other hand you have TSLA or BYND on exuberant prices with commodity businesses that have zero pricing power. 10 years from now there will still be a lot of smokers, but i doubt that TSLA cars are still on the road or that a lot of people still eat unhealthy vegetable burgers. But maybe i am just the irrational guy.

 

Just starting to dig into this business now, but:

 

2% of your business is growing at 30%, and comes at a lower price point (so unless it costs less to make, how is it accretive to PM margins?)

 

98% of your business is declining at 2-3% a year. Move 5 years out and your overall business is smaller (~2% declines on 98% + 30% CAGR for 2% of the business it's 4% smaller after 5 years), which means worse fixed cost leverage on everything, so unless you're really good at squeezing out efficiency, I don't get how margins expand.

 

If margins don't expand, and PM spends 100% of FCF on the dividend and doesn't buy back shares, I don't really get the 8% EPS CAGR figure. Since 2008 they've grown EPS at a CAGR of 4%, so  aside from major cost cuts/efficiency/IQOS being massively accretive to margins I don't really get how their #'s work.

 

My biggest question tbh is whether IQOS is accretive to margins or dilutive, on a unit basis. If you're cannibalizing yourself at a margin uplift, that's investable. If you're cannibalizing yourself at lower margins, that's a very painful investment.

 

 

[frommi]

PM had a 30% headwind to earnings the past 10 years because of the strong USD. Thats 3% per year.

 

I can only tell you the numbers for germany, but i think they are similar in other countries. A pack of Marlboro costs 7€ here, ~50% of that are taxes. So PM earns 3-3,5€ per pack. On a pack of HEET`s the tax is around 0,9€, so PM makes 5,1€ on that. I would estimates that they make 50% more on HEET`s but they have to shoulder a small loss on the device and they have to reinvest some money into the tech. Its really not a surprise that they try to push it so much lately and bet the company on it.

 

So with stable currencies alone you are at 7% growth and with IQOS bringing in more money you are easily at 8%. Margin expansion because they can take share from discount cigarette brands or currency tailwinds and they can grow faster than that. Most of the growth comes from price increases and lower costs because when you sell less cigarettes you need less factories. (Thats why Altria was one the best performing stocks the past 40 years despite volumes going down every year since then.)

 

I would argue that the moat is even stronger with IQOS than with cigarettes because in addition to the nicotin addiction you have a device lock-in.

 

Combined with Altria you get it at a 2019 P/E of 11.5, while slower growing companies like PEP,CL or KO trade at P/E multiples of 24-26.