LO - Lorillard

[cmattporter]

I have just done a brief review of their finances and I'm confused. Nothing is wrong with their INCOME STATEMENT, but their BALANCE SHEET is not in the ordinary. They've got an enormous amount of Treasury Stock and negative depreciation for example. Total Equity is negative and increasing. If any of you have time or interest in LO please let me know whats going on here for the past couple years. Thanks

 

CMP

[blainehodder]

Anyone take a close look at Lorillard?  Looks like a pretty favorable valuation due to the cloud of uncertainty around FDA action on menthol cigarettes (which LO is concentrated in due to Newport brands).

 

The company has a strong record of buybacks and dividends (current div yield of about 5.5%), and  obviously there are huge returns on capital given the industry. Also, unlike the domestic cig market in general, LO is growing at a fair clip, and may be able to continue eating market share.  The growth seems to come fairly cheap, though ad spend may not go as far as it has in the past due to a pretty competitive environment.

 

Ecigs are growing rapidly and LO is in a strong position through the Blu brand.

 

The balance sheet is fairly clean, and looks to be at the lower end of the comfortable leverage range of management, so increased returns may be generated through increased leverage as well.  It seems obvious management would issue some more debt given a more favorable market environment for an LO issue.

 

Of course, we all know what provides the "moat" in cigarettes, which brings your personal morals into the picture, but overall it looks like a pretty good Greenblattian stock.

 

I enjoy the gurufocus 10 years when looking at companies so it is inlcuded below.

 

http://www.gurufocus.com/financials/LO

 

All in all it looks pretty cheap if the FDA doesn't ban Menthol cigs... and it may be hard to force the "quit or die" model the FDA seems to be a fan of given the research on reduced cancer rates of Menthol cigs:

 

http://www.ncbi.nlm.nih.gov/pubmed/21436064

 

 

Then again...The FDA may not agree:

http://www.fda.gov/downloads/AdvisoryCommittees/CommitteesMeetingMaterials/TobaccoProductsScientificAdvisoryCommittee/UCM269697.pdf

 

We all know that politicians don't have time for silly things like science when pursuing a political agenda, so outright prohibiton may be a huge risk.  What are your thoughts?  I think LO should be able to offer double digit returns fairly easilly, which some might argue is difficult at this time outside of tech, military/gov dependent stocks, financials, or the MLM schemes.

[WhoIsWarren]

This is a couple of years old, but is a decent (short thesis) on Lorillard

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/51675

 

I haven't done much work on this stock so anything I say here really are the thoughts of a colleague.  In the absence of the regulatory cloud, Lorillard would appear to be quite cheap.  It's growing volumes and can raise prices, it's got an addicted customer base, it's throwing off cash and doesn't have to invest in R&D or spend on advertising (restricted).  But there IS a regulatory cloud.  How do you handicap the odds of a bad outcome happening?  One argument against banning menthol is that the void would likely be captured by the black economy, meaning a loss of revenue for the government / states.  So interests are definitely aligned.  The argument for banning them is that the Tobacco Products Scientific Advisory Committee report on menthol cigarettes is very damming.  The FDA has only recently (2009) received a mandate from the government to regulate, including the power to ban menthol, so we may not yet have seen their teeth.

 

The Tobacco Products Scientific Advisory Committee found:

• Menthol likely increases the likelihood and degree of addiction for youth smokers

• Menthol likely increases experimentation and regular smoking

• Non white smokers (African Americans) are less likely to quit

• Consumers continue to believe smoking menthol is less harmful due to the old industry marketing.

• The final recommendation was: removal of menthol cigarettes from the marketplace would benefit public health in the US

 

The FDA is conducting another peer reviewed study which will inform them as to possible action on menthol. 

 

Additionally, quite apart from the Engle case, for which the industry is paying out on an annual basis, the industry is still defending against 8,000-odd cases seeking damages.

 

So LO is anything but a simple story.

 

Anyone got any special insights or strong views on the situation?

[Palantir]

I really like this stock. I have no problems with selling poison as long as the people buying know that they're doing it. (AKA not in water/baby food).

 

I'm skeptical of banning of menthol cigarettes due to the concentration in the African American community, which presumably will be politically difficult.

 

The eCig market is a small fraction of LO's sales, but fast growing, I don't think it adds much value now, but in the future, it could be quite good - especially as it seems safer than regular cigarettes - no smoke/tar etc, and therefore more socially acceptable. Could even be a good razor/blades model in case they legalize cannabis.

 

EDIT: Lollilard returns nearly 10% of its capital to shareholders every year through divs and buybacks.

[ItsAValueTrap]

If menthol were banned, I'm guessing that Lorillard would take a hit but it wouldn't be the end of the world.

 

Smokers would either:

A- Smoke regular cigarettes.

B- Smoke menthol cigarettes.  From people illegally importing and reselling them.  (In Canada, there is a market for illegally-sold cigarettes due to high taxes on cigarettes.  Plus, America had a history with alcohol and prohibition.)

 

In either case LO would still have a market.

[ItsAValueTrap]

I'm curious as to what you guys think.  Which is a more ethical investment?  Lorillard or Davita?

[Palantir]

Why would Davita be unethical?

[ItsAValueTrap]

(my opinion) https://glennchan.wordpress.com/2013/06/17/for-profit-dialysis-an-unethical-industry-davita-dva/

 

http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/davita-thesis/

 

http://www.ihatedialysis.com/forum/  - Dialysis patients talk about the things they dislike about dialysis.  You can search for davita or dievita to find some posts regarding the company from their clients.