Monday, May 7, 2018

Just how bad is it for big tobacco? And a business idea for an ambitious investment banker

Big tobacco stocks have had a bad month. Philip Morris had its worst day (for stock performance) in a decade. Electronic cigarettes and vapes etc are taking market share - and they are interrupting the big (old) brands of combustibles.  There has been plenty of press - here is an example from Fortune.

I just want to throw up a single data point. Swedish Match (a tobacco company with no cigarette brands) owns the world's biggest match and lighter business. If you live in Latin America, Asia-Pacific or Europe you have almost certainly used the products. Here are the main brands:

Main brands:
Matches: Solstickan, Swan Vestas, Tres Estrellas, Fiat Lux, Redheads
Lighters: Cricket

Redheads and Cricket are totally dominant in Australia.

Here, from the last quarter, are the results for the "lights" business - just the volumes.

Yes, you are seeing 11 percent volume decline for matches, 23 percent decline for lighters.

If you are a big tobacco investor your only reaction has to be oh f--k.


Now if you are an investment banker here is a deal from heaven. This match and lighter business has distribution almost every place in the world outside North America where you want to sell cigarettes.

It is thus a perfect distribution entree to a new e-cig business - and this e-cig transition is a once-in-a-lifetime opportunity to break the big tobacco brands.

The business is only a partial fit for Swedish Match (who mostly sells Snus in Scandinavia and chewing tobacco and machine rolled cigars in North America).

There has to be a deal to be done, a billion dollars to be made.



dan said...

John, one counter-point - as smoking becomes more socially unacceptable, the remaining tobacco customers are rusted-on addicts that are virtually inelastic to price movements. As a result, the price hikes that big tobacco can rip out of these poor souls are growing by a huge amount. And the government is giving them heaps of cover as their excise increases hide their price rises.

Anonymous said...

Great post. Big Tobacco being doomed and next-generation products like e-cigs being the future are probably good ideas that stand on their own merit. However, on a factual point, Philip Morris' share price collapse was triggered by fears that its own next-generation product may not be disruptive enough (reaching some sort of plateau in Japan). And the decline in cigarette volumes in Europe seems to be happening quite independently of the growth in e-cigs, which most data sources show to be of minimal significance outside the US and the UK.

Anonymous said...

Hi John,

if you look at BIC Groups Q1 numbers they report a decrease in net sales of 11.3% for Q1 and 0.5% on a comparative basis (they sell a lot more lighters than Swedish Match). They claimed low to mid-digit net sales increases (on a comparative basis, which they explain in their glossary) in Europe and North America but double-digit decreases in Latin America, apparently being largely driven by "on-going inventory adjustments by retailers in Brazil" Although North American sales likely were supported by retailers buying ahead of an April 1st price hike (sadly for them not an April's fool).

golfer73 said...

Hi John,

interesting angle but you overlooked several things. First, BB FP has a lighter business which is 3x that of Swedish Match - Swedish Match has been losing market share to BB for a long time, so their numbers do not reflect the market.

Second, there would be tremendous dissynergies in disposing of the light business. The distribution network is the same used by mass market cigars and new "reduced risk products" such as Zyn. These products are the only reason why SWMA escaped the big tobacco bloodbath. SWMA needs the distribution network to make these things work.

Finally, the only guys who could afford to acquire the lights division would be big tobacco anyway. And they already have the distribution network they need. All the other players are just too small. JUUL (only meaningful independent), which has 50% market share of e-cig in the US, already has the distribution network it needs

GSP said...

I really like your idea about distribution. Regarding lighters, which probably most people use (and not matches). BIC (French listed) is the undisputed #1 in the world with a sales volume 5x that of Swedish Match.

BIC is a very interesting investment case by the way.

Salma Hayek said...

we should boycott tobacco it's causing losing precious lives

Anonymous said...

John, I saw your tweet about @Infitialis_ . Infitialis_ was largely (but not exclusively) Kerrisdale Capital.

Anonymous said...

A good article on juul in the newyorker recently

Winickoff is a pediatrician at Massachusetts General Hospital and a professor at Harvard Medical School. A few weeks after we spoke, the American Academy of Pediatrics joined the American Lung Association and others in their lawsuit against the F.D.A. “If you were to design your ideal nicotine-delivery device to addict large numbers of United States kids, you’d invent Juul,” Winickoff said. “It’s absolutely unconscionable. The earlier these companies introduce the product to the developing brain, the better the chance they have a lifelong user.”

Clearly there is a massive transition / disruption to the distribution of this business.

I think the message worth getting out to your readers is to protect their loved one's from these devices. Not necessarily to hype them as a great M&A opportunity.

Sorry if it sounds like I am taking the moral high ground, but too many 'technological breakthroughs' these days are genuine disruptors in more ways than one.

cherryjoy said...

For tobacco investors, these statistics are quite horrible!! 11 and 23 percentage of decline is huge. What are your views on FOREX trading ?

bsauer11 said...

I'm guessing you have a short position in PM as your oversight is staggering. Below are just a couple of ideas that come to mind in relation to your inadequate deduction.

1. Juul's sales for 2017 were 224 million while PM reported LTM revenue of roughly 32.4 billion...highly doubt e-cigarette growth is the catalyst for PM's decline in share price. A more sound argument could be related to the growth of ESG investing. E-cigarettes have been around for a long time, the young people using them believe the act to be trendy. I don't have a ton of faith in a company who's core demographic is primarily motivated by what is currently popular...Snapchat comparison??

2. The FDA is already looking into Juul due to it's heightened popularity among minors and variety of sweet flavors. As such, I'm sure there will be more regulation to follow pertaining to it's distribution...lobbying needed??

3. As noted above, if there is a deal to be made Big Tobacco has EXTREMELY deep pockets.

4. Juul's have many downsides; another item to charge, easy to lose with expensive replacements for both the device and charger, short life of nicotine pods with expensive replacement compared to cigarettes, unknown health effects from electric vapors, etc.

Anonymous said...

swedish match stock price is at an all time high and 25 P/E it's not reflecting the volume decline you show in q1 2018.

what do you think of a short here?

Anonymous said...

We should boycott also guns industry and all the government officials that benefit from it. Yet we systematically vote stupidly for them... right?

Alex Spikes said...

guns are dangerous

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