Tobacco Industry Final 2

8/3/2019 Tobacco Industry Final 2

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J O N A T H A N C H U M B L E R

C H R I S F O W L E R

Tobacco Industry1


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Agenda

Overview/History of the Industry

Current Conditions

Industry Analysis

Company Analyses Summary

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The Tobacco Industry

The industry is composed of multiple sectors Tobacco Growing

Tobacco Products, Manufacturing and Retail

The tobacco market covers the sale of :

Chewing tobacco Cigarettes

Cigars and cigarillos

Loose tobacco

The industry is facing growing health concerns related toits product, mainly from cigarettes as an intra-industryshift towards smokeless tobacco opens new opportunitiesfor some firms

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Tobacco Growing

This sector is composed of small U.S. farms thatgrow and sell tobacco to cigarette companies andother tobacco product retailers

2005, consumers spent $80.7 billion on tobaccoproducts 2002-$89.1 billion, 2000-$77.7 billion

Southeastern states produce 95 percent of the

demand for tobacco North Carolina and Kentucky accounting for about 81 percent

of production

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Tobacco Products, Retail

This sector is composed of the firms thatmanufacture and sell tobacco products

Cigarettes, cigars, smokeless tobacco, and tobacco accessories

This is the dominant sector of the tobacco industry Spans more international borders than its agricultural

counterpart

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History

1 B.C. American Indians began using tobacco inmany different ways (religious and medicinal)

1760, P. Lorillard establishes company in NYC,

oldest tobacco company in the U.S. 1826, the pure form of nicotine is discovered.

1847, Phillip Morris is established

1875, R.J. Reynolds Tobacco Co. is established

1966, health warnings on cigarette packs begin topop up

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History (contd.)

1971, TV ads for cigarettes are taken off air in theU.S.

1982, the Surgeon General reports that second hand

smoke may cause lung cancer. Smoking in public areas is soon restricted

1990, smoking is banned on all domestic flights

1990, San Luis Obispo, CA becomes first city in the

world to ban indoor smoking at public places

2003, WHO FCTC adoptes 56 World HealthAssembly

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Agenda


Current Conditions

Industry Analysis


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Current Conditions

The tobacco industry continues to face a number ofsignificant challenges, including: Weak economic climate

State sales tax increases Excise taxes placed on cigarettes by state-based legislation has

increased in the mid-2000s

As of 2006 six states had taxes above $2.00per pack while 25 states are in excess of $1.00 per pack

Falling demand for cigarettes The domestic consumption of cigarettes has fallen every year since 2000

This decline in demand for cigarettes due to taxes has resulted in an increasein demand for smokeless tobacco, opening revenue opportunities for firmswho enter this market

Growing popularity of smoking ban legislation E.g. the attempted ban on smoking in Tuscaloosa restaurants

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Related Health Concerns

In the mid-1990s US tobacco companies were forcedto pay millions of dollars in settlements to states thatsued conglomerated tobacco for their role inunderstating the health risks associated withsmoking

These cases were followed by an onslaught of classaction suits and other litigation costing the tobacco

industry millions of dollars, this litigation is notexpected to cease in the near future making the long-term viability of tobacco profits questionable

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Related Health Concern (contd.)

The US media has gone to great lengths to stress thehealth concerns of smoking for consumers

This media attention has lead to an overall decline in

US tobacco sales, however a move to internationalmarkets has benefitted some tobacco industry firms Philip Morris International has spread to foreign markets not

so gripped by a media frenzy to stop people from smoking andhas experienced recent growth potential

Other firms have made a move towards smokeless tobacco aswell as investment in products designed to help nicotineaddicts quit (e.g. Star Scientific Inc.)

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Agenda


Current Conditions

Industry Analysis


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Porters Five Forces Model

RIVALRY

High

SUBSTITUTES

Low

BUYERPOWER

Moderate

THREAT OFENTRY

Low

SUPPLIERPOWER

Moderate

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Market Value

Year $ billion % Growth

2003 318.4

2004 332.5 4.40%

2005 346.1 4.10%

2006 361.3 4.40%

2007 378.0 4.60%

The compound annual growth rate of themarket from 2003-2007 was 4.4%

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Market Segmentation

36.80%

32.50%

30.70%

% ShareEurope

Asia-Pacific

Americas

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Industry vs. SP&500 (past 5 years)16


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Tobacco Industry YTD17


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Effects of Recession

The tobacco industry has outperformed the S&P 500 over the last threemonths

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Historically the tobacco industry has typically been a good defensiveplay during periods of high volatility in the market, this coupled withthe fact that the industry has shown improving conditions makes itappealing during these poor economic conditions


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Major Industry Players

Altria Group, Inc. (MO)

Philip Morris International, Inc. (PM)

Reynolds American Inc. (RAI)

British American Tobacco PLC (BTI) Universal Corporation (UVV)

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Agenda


Current Conditions

Industry Analysis


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Altria Group, Inc. (MO)

Headquarters in Richmond, Virginia (United States) Holding company owning Philip Morris, which has a

50% share of domestic market for cigarettes

Recently acquired UST Inc, which has a leadingshare in the US smokeless tobacco market Smokeless tobacco is a promising market as state excise taxes

and health concerns push sales away from cigarettes and intothe smokeless tobacco market

Plans to use $4 billion in cash reserves to repurchasecommon stock, showing good use of its strong cashflow

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Altria Group, Inc. (contd.)

YTD vs. S&P 500Close 11/18

Market Cap. $34.94 B

52-week High 24.55

52-week Low 15.9

EPS 1.7

ROA (TTM) 8.93%

ROE (TTM) 30.17%

Index

Good pick for investors looking for a goodincome stock as it has remained resilientdespite the weak economy and recentlyraised its quarterly dividend by 10% to$0.32 a share

Closing price on 11/18$16.96

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Altria Group, Inc. (contd.)23

5-years vs. S&P 500


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Altria Group, Inc. (contd.)

Recommendations Current Owners: HOLD

Potential Owners: BUY

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Philip Morris International (PM)

Headquarters in Lausanne, Switzerland Main products: Marlboro, Basic, Parliament, Virginia Slims

Spun-off from parent company, Altria in March 08

Well-positioned in markets with high-growthpotential

Has a sound business model with strong balancesheet

Is the market leader in 11 of the Top 30 international

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Philip Morris Intl. (contd.)

YTD vs. S&P 500Close (11/18)

Market Cap. 73.18B

52-week High 56.2652-week Low 33.30

P/E 11.57

EPS 3.33

Index

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Good pick for income-oriented investors



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Phillip Morris Intl. (contd.)



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Reynolds American (RAI)

Headquarters in Winston-Salem, North Carolina (USA) Second largest producer of cigarettes in the US

Brands include: Camel, Winston, Salem, Pall Mall,Kool, and Doral.

Currently experiencing declining sales in light of both aweakening economy and a shift from cigarettes tosmokeless tobacco

Plans to make investments into the smokeless tobacco

industry over the coming years, but little promise isshown for short term opportunities as their sales arethreatened by Altrias purchase of UST Inc.

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Reynolds American (contd.)

YTD vs. S&P 500Close 11/18

Market Cap. $13.1 B

52-week High 72.0052-week Low 37.21

EPS 4.68

ROA (TTM) 7.43%

ROE (TTM) 18.46%

Index

Not expected to show outstanding growthin the coming 1-3 years, however afterinvestments into smokeless tobacco beginto show returns prospects could improve


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Reynolds American (contd.)

Recommendations Current Owners: SELL

Potential Owners: DO NOT BUY

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British American Tobacco (BTI)

Headquarters in London, England

Established in 1902 by joint venture betweenImperial Tobacco (UK) and American Tobacco

Company (USA) Main products: Kent, Dunhill, Lucky Strike, Pall Mall

Expected profit growth should remain solid, globally

Profits rose in last quarter in all regions except Latin America

Benefitting from a brand migration to South Africa

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British American Tobacco (contd.)

YTD vs. S&P 500

Close (11/18)

Market Cap. 52.11B

52-week High 81.04

52-week Low 45.49

P/E 15.01

EPS 3.47

Index

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Sales are expected to increase as brandsare introduced into new foreign markets

This stock is ranked to outperform thebroader market in the next six to twelvemonth period


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5 years vs. S&P 500

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Universal Corporation (UVV)

Headquarters in Richmond, VA (USA)

Worlds largest importer/exporter of leaf tobacco

Sells cured tobacco to cigarette, cigar, and pipe

tobacco companies Presence in over 35 countries worldwide, with that

number expected to grow as their global marketshare rises

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Universal Corporation (contd.)

YTD vs. S&P 500

Close (11/18)

Market Cap. 910.53M

52-week High 68.04

52-week Low 34.92

P/E 9.86

EPS 3.69

ROA (TTM) 5.60%

ROE (TTM) 12.95%

Index

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Universal Corporation (contd.)

5-years vs. S&P 500

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Long term prospects are good as cost cutting strategies take hold and globalmarket share is increased

Short term prospects are not as promising while the company deals with aweak dollar being used to finance its overseas operations and high food grainprices made farmers devote less acreage to tobacco, increasing leaf prices


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Universal Corp. (contd.)


Potential Short-term Investors: DO NOT BUY

Potential Long-term Investors: BUY

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Agenda


Current Conditions

Industry Analysis


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Recommendations40

(MO)

Current Owners: Potential Owners:

(PM)


(RAI)


(BAI)


(UVV)



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Nick Saban Chews Tobacco41


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Tobacco Industry

Questions?

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Tobacco Industry Final 2

Documents

Transcript of Tobacco Industry Final 2