|
|
|
|
||
Re: PM lowers 2018 guidance for currencyDo you think the presentation was enough to boost the stock, or will analysts wait until next quarter to reassess PM's future prospects? I did not listen to the presentation, but did review the slides that PM has on their website for the annual meeting. As always, I have no idea what happens to the stock in the short run. I wouldn't believe anyone that tells you they can. So I focus only on the companies business and earnings prospects over a 5-10 year period, including the macro-economic factors which I believe are the cause of a majority (but obviously not all) of the recent revaluation of the companies stock down. Management clearly focused almost all their slides in today's presentation on IQOS. Their goal clearly is to convince shareholders that IQOS and other RRP's are still the future of the company, and that any lulls in adoption are to be expected and are temporary. By 2025, they believe that 30% of all their volume sold will be RRP's. They state the only ceiling for RRP's is the worldwide current smokers, who number 1.1 billion people. Lastly, they believe that the share price decline since their earnings call essentially means the market values IQOS at nothing (or even negatively), which is something I would at least partly dispute. Regardless, as a long term investor, here is what I worry about most. PM (as well as MO) obviously cannot promote RRP's to non-smokers because that will violate laws and/or alienate public health officials goals. The problem is if that worldwide nicotine user markets continue to decline just as traditional cigarettes have, that means it purely is a market share fight over current smokers, and probably a more expensive one than the previous one over cigarettes alone. Right now, IQOS is clearly winning the fight due to a few year head start and technology that appears to be customers preference. But as JUUL (and several other previous e-cigs in the US) has shown, that preference can be very fleeting. Even if PM (and MO) ultimately prevail with the best RRP's out there and take market share, they likely are going to have to spend a lot more money over the next 5 years to do that, and then quite a bit more to stay there. Their major competitors like BAT and JTI are not going to go down with a fight and spending billions themselves, as they already are in Japan. That is unlike the historical competitive landscape in traditional cigarettes, where promotional spending was typically around the edges and not full out war. Japan is a good case study so far. PM has grabbed an astonishing 15.8% of the market there with IQOS in less than 3 years, and last year generated a profit despite losing money on the sale of each device sold. However, if they had taken that 15.8% of the traditional cigarette market without having to spend additional money, their profits would have skyrocketed. That clearly did not happen. Instead, the extra cost of IQOS, and the cannibalization of their traditional cigarettes sales, offset much of the revenue gains. And this was clearly in their ideal market, where they only had 25% market share prior to IQOS introduction. When they compete in other markets, such as the EU and the US, they start with nearly 50% market share in a lot of cases, and will now face competition almost immediately. That likely necessitates even higher spending and longer periods of time to gain RRP customers in those countries. The reality is that RRP's may disrupt the whole industry. The pure cigarette industry used to have relatively mild competition, strong pricing power, and no real avenue for disruptive new competitors to enter given often severe restrictions on cigarette marketing. Even in a shrinking user market, that provided unique pricing power which provided predictable profit growth and good visibility for continued success for the few major players in each market. The big question is now whether RRP's will unlock a potential flood of new competitors, like those seen in many other consumer sectors and products. For example, micro-breweries, organic food companies, local produce sellers, & upstart razor, soap, cosmetic companies have heavily impacted the entrenched dominant sellers of mass produced products in their categories, making them less profitable. JUUL in the US could be the start of that trend in nicotine, or just a flash in the pan. Or JIT and BAT might eventually develop an RRP that defeats IQOS. At this point, there is no going back. PM & MO are going to have to adapt and compete. But it is going to take some time to know how successful they will be, as well as what the impact will be on the overall market. Will the overall profit pool of the whole industry remain strong and growing, or get competed away in an increasing market share fight? A single presentation, or even the next several quarters of actual earnings, are unlikely to answer those major questions, so I think a cloud of uncertainty is likely to remain for a while. Which probably means PE multiples much more in line with historical averages, rather than premium valuations. |
return to message board, top of board |
Msg # | Subject | Author | Recs | Date Posted |
12226 | Re: PM lowers 2018 guidance for currency | mo_strategist | 1 | 5/10/2018 12:55:22 PM |