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Re: Volume discussionYour concerns are not unwarranted, but none are really new either, with the possible exception of technological innovation. Most of those concerns have been around for decades, not just the threat of lawsuits. For example, cigarette smoking in the US has dropped from a high of over 40% of the adult population in the 1960's, to around 14% today. And yet, MO has made increasing record profits every year during that half century decline. Furthermore, 14% of the US adult population today is still about 35 million smokers. The price elasticity of cigarettes has also stayed pretty constant over the years, at a -0.3. That means for every 10% increase in the cost of cigarettes at the retail level, 3% fewer cigarettes are typically bought by consumers. In the absence of any real new competition (which is barred by a lot of regulation and advertising bans), that is incredible pricing power. Could that change? Possibly, but it hasn't thus far in decades. Furthermore, the relative cost of a pack of cigarettes is still pretty reasonable compared to many other vices (say a 6 pack of beer). Yes, there are places in the US where a pack of cigarettes now costs over $10. But the average cost of a pack of Marlboro's in the US is currently $6.79. That is still pretty low. A tin of Copenhagen goes for an average of $4.80. Both give MO the ability to raise prices annually without disrupting markets, especially if excise taxes are stable, which mask the extent of the price increases that MO is making. Around the world, the situation is similar. There are rich countries where cigarettes are much more heavily taxed and the price is over $15 per pack. But there are also countries where the price is still well under $1. Tobacco companies make money in both kinds of markets, but significantly more where the prices are higher. And yes, if governments raise excise taxes dramatically, there is a disruption, as was evidenced by California's hike of $2 per pack a year and a half ago, or when Saudi Arabia effectively doubled the price of cigarettes there via a huge excise tax hike. But things like that remain fairly rare. The US federal excise tax remains at $1.01 per pack, unchanged since 2009, when Democrats controlled the House, Senate, and Presidency. The average US state excise tax is now $1.78 per pack. Combined federal and state excise taxes therefore average $2.79 per pack, out of the $6.79 average Marlboro retail price. Sure, regulation and excise tax hikes are always a risk, but in a politically divided nation, the policy results are usually moderate. Global politics can be more volatile, but again, the disruptive actions seem to spread out and be mitigated over time. On technological innovation (i.e. e-cigs, IQOS, etc.), I have commented numerous times before. It might make the overall industry less profitable if it is a more expensive fight over the same customers. But it also might reduce health impacts and stigma on smoking/vaping, which might stabilize or grow the consumer base. I think it is still too early to know either way, but thus far, despite their growing popularity, they remain a pretty small part of the overall market. In addition, the vaping experience has not proved appealing to the large majority of existing smokers, with many of the adopters instead being underage new users who never previously smoked cigarettes. Given their size and now known health realities of their products, I don't think you can count on tobacco companies being nearly as good an investment in the next 50 years as they have been in the past 50 years. But I do think they still can be a very solid investment that should outperform the overall market averages over time, especially now that PE's/valuations are much more reasonable. |
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Msg # | Subject | Author | Recs | Date Posted |
12305 | Re: Volume discussion | Rice1 | 0 | 12/4/2018 2:10:17 PM |