PM - Philip Morris International

[Spekulatius]

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.

 

What makes you think that the FX headwinds don’t persist. I think the Euro is pretty fairly valued here, with limited downside, but a lot of EM currencies could really hit the skids if we get a recession or even an economic slowdown.

[frommi]

What makes you think that the FX headwinds don’t persist. I think the Euro is pretty fairly valued here, with limited downside, but a lot of EM currencies could really hit the skids if we get a recession or even an economic slowdown.

 

Maybe they do, i don`t think that is something that i can know in advance. Argentina for example is 3% of volume for PM and i can imagine an even lower percentage on operating income. The Yen on the other hand makes up a larger chunk of the revenue and is typically a safe heaven in hard times, so maybe it can compensate some weak EM currencies in that scenario.

But since i live in europe and pay my bills in €, PM is a good hedge against a weak USD for me.

 

 

 

[no_free_lunch]

I found this regarding the investigation into vaping related illnesses.  I think that the investigation into vaping caused a small drop into MO, this indicates they may not be at fault.

 

State and federal investigations into the puzzling burst of severe lung illnesses linked to e-cigarette use—aka vaping—are focusing in on black-market and counterfeit products, according to a report by the Washington Post.

 

Vaping-linked lung disease cases jump from 94 to 153 in 5 days, CDC says [updated]

Unknown adulterants and dubious solvents—such as oils and diluting “cutting agents”—in vaping liquids are now the prime suspects behind the illnesses, which have has led to 215 possible cases in 25 states. One person in Illinois has died. Investigators say that in many of the cases, people bought suspect products on the black market or in “pop-up” shops.

 

https://www.washingtonpost.com/health/as-vaping-related-lung-illnesses-spike-investigators-eye-contaminants/2019/08/29/cfe26032-ca78-11e9-be05-f76ac4ec618c_story.html?noredirect=on

 

 

MO and PM are looking good right now.  The dividend at MO is now at 7.5% vs a 30yr treasury at 2%.  If concerns can ever simmer, and they will if you can just get a few months with no additional bad news, that huge gap could tighten.  Meanwhile you just sit on the fat dividend.

[peterHK]

As a tobacco analyst said "the issue is that the growth is coming from a product with a terminal risk to it" (the terminal risk being that regulators seem to now be gunning for vaping). Not an expert, but I know with something like pipelines I can't handicap the political risk of a project passing or not, and for tobacco I sort of feel the same way (and this is with a poli sci degree). There's a risk that the regulators kill vaping before it really takes off and you're stuck with a declining business, and there's a risk that just like with tobacco regulators try to kill it and only end up making it a better business.

 

One difference is that when regulators started really going after smoking, smoking was a "mature" and highly penetrated industry. Today vaping is in its infancy, and much smaller relative to smoking, so what will the effects be if say we get the old tobacco treatment but on an industry 1/5th the size of tobacco.

 

I can't figure out which future is more likely though, and so it's sort of hard to figure out what the real risk here is, and therefore I have trouble saying the risk/reward is good or not. There is a real risk, I think, that vaping isn't the saviour tobacco wants and so there's a big big risk of terminal decline in which case is a 7% dividend yield that's going to start shrinking enough?

[frommi]

Yeah kill vaping, thats great for PM. IQOS is already approved by the FDA, its very unlikely that it gets banned. And what will people smoke that vaped until that point? As long as cigarette volumes keep falling at a moderate level  (what they have done for >30 years now) where price increases can more than compensate for that, this is just a great business. And when you look at PM`s volumes over the last year cigarette volumes are really falling so slowly that overall volume was basically flat.

 

Altria should get its shit done and spread IQOS far faster than they do right now. I am pretty sure that PM`s management was not very satisfied with Altrias slow roll out plan, and that is the true reason for the merger. Altria`s management made some really stupid decisions starting with the investment JUUL and Cronos, both investments that are in the focus of the current investigations because the e-vapor deaths are linked to THC usage in open pod vaping systems. I really hope that the PM management gets rid of all the investments from Altria somehow and simply buys back shares.

[DooDiligence]

“Today’s teenager is tomorrow’s potential regular customer, and the overwhelming majority of smokers first begin to smoke while still in their teens…The smoking patterns of teenagers are particularly important to Philip Morris.”

 

https://www.industrydocuments.ucsf.edu/tobacco/docs/#id=fgpb0040

 

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“the tobacco industry continues to position itself to sustain its sales by recruiting youth and young adults…as consumers of all their nicotine-containing products including cigarettes.”

 

https://www.hhs.gov/surgeongeneral/reports-and-publications/tobacco/index.html

 

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I made a terrible decision buying into Altria.

 

Their business goes against my core principals, 3 of which are honesty, fairness & helping others.

 

The likelihood of a thing turning out well when these principals are ignored is slim.

 

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Altria is a scorpion & I'm just a stupid frog.

[Castanza]

https://www.cdc.gov/tobacco/basic_information/e-cigarettes/severe-lung-disease.html

 

 

[DooDiligence]

https://www.cdc.gov/tobacco/basic_information/e-cigarettes/severe-lung-disease.html

 

Yep.

[Castanza]

https://finance.yahoo.com/video/trump-admin-considers-ban-flavored-175044178.html

 

Government action.....sigh

[CorpRaider]

Regulatory capture?  Probably works better for everyone to have a few trusted/regulated dealers versus the wild west.

[Castanza]

Regulatory capture?  Probably works better for everyone to have a few trusted/regulated dealers versus the wild west.

 

Yeah I agree from an investment standpoint. If a regulatory body can study this in depth and determine it was something else causing the issues (most likely) then it could help to reduce liability moving forward for PM and MO. Most likely they will never get deemed "safe." But if the government or a trusted regulator deems them "safer than tobacco" then that has to be good.

 

Question is how long will studies of this nature take?  This political attack is focused on children which is always a prime time attention grabber and heading into elections I imagine this will become a big talking point. Certainly this will have some impact on share price.

[jgyetzer]

I am looking at the Q3 numbers today.  Combustible volumes are declining and RRP (especially IQOS) volumes are rising rapidly.  The result is declining total revenues but increasing margins with slowly improving overall earnings.  This pattern reminds me of the cable industry as it transitioned from video to broadband as a primary business.  The economic value of the RRP products lines seem to be hidden in the mix, but with the rapid growth it looks like that will become the biggest driver of total revenue and profits within a few years.  Plus, with reduced risk products, the lifetime value of customers are made better not just through higher profitability, but also longevity (helps not to kill your customers).  Has anyone else looked at this?  At the current price, it doesn't seem like much has to go right.

[ukvalueinvestment]

I understand the margin differential is partly because of lower taxes for the next generation products.  I would like to understand if that is anticipated to be a permanent state.

[Spekulatius]

I am looking at the Q3 numbers today.  Combustible volumes are declining and RRP (especially IQOS) volumes are rising rapidly.  The result is declining total revenues but increasing margins with slowly improving overall earnings.  This pattern reminds me of the cable industry as it transitioned from video to broadband as a primary business.  The economic value of the RRP products lines seem to be hidden in the mix, but with the rapid growth it looks like that will become the biggest driver of total revenue and profits within a few years.  Plus, with reduced risk products, the lifetime value of customers are made better not just through higher profitability, but also longevity (helps not to kill your customers).  Has anyone else looked at this?  At the current price, it doesn't seem like much has to go right.

 

What does PM offer (other than country diversification) that MO doesn’t? MO should have more pricing power (Price for cigarettes in thr US is relatively low) and is cheaper.

 

I think what spooked the markets with PM is the 7.6% unit volume reduction which includes IQOS sales. The tobacco market goes up in smoke way faster than historically.

[ukvalueinvestment]

Spekulatius : I think part of the answer is secular, emerging markets growth.  More people, spending more money smoking and with (on average) less concern for their health than the US consumer.

[Castanza]

It's probably worth owning a bit of both but I tend to agree that PM has more broad exposure to some attractive markets.

[K2SO]

I am looking at the Q3 numbers today.  Combustible volumes are declining and RRP (especially IQOS) volumes are rising rapidly.  The result is declining total revenues but increasing margins with slowly improving overall earnings.  This pattern reminds me of the cable industry as it transitioned from video to broadband as a primary business.  The economic value of the RRP products lines seem to be hidden in the mix, but with the rapid growth it looks like that will become the biggest driver of total revenue and profits within a few years.  Plus, with reduced risk products, the lifetime value of customers are made better not just through higher profitability, but also longevity (helps not to kill your customers).  Has anyone else looked at this?  At the current price, it doesn't seem like much has to go right.

 

What does PM offer (other than country diversification) that MO doesn’t? MO should have more pricing power (Price for cigarettes in thr US is relatively low) and is cheaper.

 

I think what spooked the markets with PM is the 7.6% unit volume reduction which includes IQOS sales. The tobacco market goes up in smoke way faster than historically.

 

The social acceptability of smoking is much higher outside of NA.

 

On this topic, last year I sat across from someone who was smoking iQOS for an entire evening (in a restaurant in Europe). The second hand smoke does not smell. And so he did not feel bad about smoking it all night, and throughout dinner. He pointed out that while he preferred combustible cigarettes, the no-smell advantage of the iQOS, as well as the supposed health benefits, had sold him on it.

 

Many smokers I know in the US haven't even heard of this product.

 

I think there is an underappreciated growth runway for both PM and MO.

 

[ukvalueinvestment]

My view is that if you want to bet on people being addicted to nicotine in one form or another for decades, then MO - as owner of IQOS, the most successful NGP, is the one to own.

[JRM]

My view is that if you want to bet on people being addicted to nicotine in one form or another for decades, then MO - as owner of IQOS, the most successful NGP, is the one to own.

 

MO has distribution rights to IQOS in the US, but it is actually a PMI product.

[ukvalueinvestment]

My view is that if you want to bet on people being addicted to nicotine in one form or another for decades, then MO - as owner of IQOS, the most successful NGP, is the one to own.

 

MO has distribution rights to IQOS in the US, but it is actually a PMI product.

 

Apols - I used the wrong ticker - confused easily.  Meant Philip Morris.