Tobacco Industry Final 2
Transcript of 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
Overview/History of the Industry
Current Conditions
Industry Analysis
Company Analyses Summary
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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
Overview/History of the Industry
Current Conditions
Industry Analysis
Company Analyses Summary
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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
Overview/History of the Industry
Current Conditions
Industry Analysis
Company Analyses Summary
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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
Closing price on 11/18$38.31
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Phillip Morris Intl. (contd.)
Recommendations Current Owners: HOLD
Potential Owners: BUY
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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
Closing price on 11/18$44.95
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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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Closing price on 11/18$52.17
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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British American Tobacco (contd.)
5 years vs. S&P 500
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British American Tobacco (contd.)
Recommendations Current Owners: HOLD
Potential Owners: BUY
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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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Closing price on 11/18$36.44
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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.)
Recommendations Current Owners: HOLD
Potential Short-term Investors: DO NOT BUY
Potential Long-term Investors: BUY
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Agenda
Overview/History of the Industry
Current Conditions
Industry Analysis
Company Analyses Summary
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Recommendations40
(MO)
Current Owners: Potential Owners:
(PM)
Current Owners: Potential Owners:
(RAI)
Current Owners: Potential Owners:
(BAI)
Current Owners: Potential Owners:
(UVV)
Current Owners: Potential Owners:
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Nick Saban Chews Tobacco41
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Tobacco Industry
Questions?
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