Bill1703
31 Jul 2017
Re: Overdone "This is a minor blip compared with some previous hurdles the Tobacco Industry has had to clear... I thought it was the end then - much like it was for asbestos industry; but the tobacco firms have gone from strength to strength."Indeed, Hardboy - people have been trying to call "game over" for the tobacco industry for decades now... one day they may even be right, but not today, I think.It is a common failing for domestic investors to focus excessively on the narrower Western, developed world perspective for genuinely globally diversified businesses... yes, smoking is in secular decline in the US (some 4% of the world's population) and the UK (less than 1%). For most of the rest of the planet, smoking rates are higher and either still growing or at least relatively flat... as indeed are the rates of population growth. Not to shrug it off entirely, the US is actually a higher proportion of revenues and, in particular, profits for both BAT and IMB than it used to be, thanks to recent business combinations and acquisitions... but equally, it's hard to see much change to the current economic trajectory of their US operations for years to come. Meanwhile, they run this business for (very good) cash flow, with all growth investment and marketing effort devoted to the still-developing, but mostly already large, markets elsewhere. "... According to the IC FTSE 100 PE is 31.6 & yield 3.77%... given those facts they appear significantly undervalued. (Though I'd be more inclined to think they are fairly valued & the FTSE100 is heading for a correction.) "But I will pick you up on this point. I have seen others quote a 30+ PE multiple for the market, but it's effectively nonsense IMHO... not sure exactly what the issue is, most likely it's an historic multiple heavily distorted by one-offs and otherwise exceptionals, write-downs, etc, particularly for stocks disproportionally "heavy" in the index. My impression is the current effective, underlying P/E for the UK market is some 15-16x (I will try to source a precise figure)... sure, toward the upper end - but crucially, not above - the historic sustainable range.And your 3.77% dividend yield - which looks right to me, typically unaffected by such distortions as above - is actually towards the "cheaper" end of the long term range! And expected to grow steadily, even on muted earnings growth, given the general relative health of corporate cash flows and balance sheets. So tempted to say.... correction, what correction?! Would be foolhardy for me to say we won't get one (I mean in the near term... we'll definitely get one eventually!), but I WILL say that if we do, it will NOT be because the valuation parameters have become impossibly stretched - as they were in, say, 1929, or in 1999! And I will also say that, if we do get a correction, I know what I'll be doing... buying it, and probably in some size! And I suggest you should too...
Hardboy
31 Jul 2017
Re: Overdone "Sorry I think it is the beginning of the end for Tobacco shares;it will be a gradual decline but legislation like that proposed in USA will spread.........BATS & other tobacco shares are grossly overvalued."This is a minor blip compared with some previous hurdles the Tobacco Industry has had to clear. It maybe 15-20 years ago there were court cases with individuals suing Tobacco firms for giving them cancer. I thought it was the end then - much like it was for asbestos industry; but the tobacco firms have gone from strength to strength. Developed countries have tried taxing tobacco firms out of existence, tried to kill the industry by banning advertising and putting huge warning signs on packets; but while volumes may decrease in these markets, profits continue to grow; and meanwhile emerging markets remain strong, and the growth of e cigarette industry is taking off. As for them being grossly overvalued. According to the IC FTSE 100 PE is 31.6 & yield 3.77%. Bill has kindly posted PE & yield figures for the Tobacco giants, and given those facts they appear significantly undervalued. (Though I'd be more inclined to think they are fairly valued & the FTSE100 is heading for a correction.) I've not got either BATS or IMPS, but when the slide stops I think there will be a good buying opportunity.
tradingup
31 Jul 2017
overdone? not according to today's late trades.
Bill1703
31 Jul 2017
Re: Overdone "Sorry I think it is the beginning of the end for Tobacco shares;it will be a gradual decline but legislation like that proposed in USA will spread.........BATS & other tobacco shares are grossly overvalued." When the Kazakhstani regulator gets similarly involved, it'll be time to worry....
TX2
31 Jul 2017
Re: Overdone Sorry I think it is the beginning of the end for Tobacco shares;it will be a gradual decline but legislation like that proposed in USA will spread.........BATS & other tobacco shares are grossly overvalued.
Bill1703
31 Jul 2017
Re: Overdone "The US is about a sixth of BATS revenue (I believe this excludes the impact of acquiring the remains of Reynolds that it did not already own). It is a declining market and has been for years... The US regulator may do something to reduce nicotine content. I may be missing something, it wouldn't be the first time, but I don't see the big deal..."Charlus - in response, see below, which I paraphrase from what I have just posted on the IMB board.In short - the US is a bigger deal from BATS than you suggest... but otherwise, I generally concur...__________ _______"Clear evidence of market irrationality today IMHO, both in absolute and relative terms. We already knew the US market was one of heavy, invasive regulation and steady secular decline in volumes and (to a lesser extent) revenues... not sure what has changed? On "proposals" - for consultation - which will take years to effect, and which are unlikely to stop committed smokers from smoking (beyond, at least, the prevailing consistent pattern of both existing smokers quitting, and those switching to "next-gen" alternatives).And IMB down 6% but BATS less than 5%... really? Given BATS makes a tad more than 40% of operating profit in America currently (when you fully consolidate Reynolds, which they now indeed have) - around double the proportion for IMB??The numbers as I write... prospective divi yield up to 5.5% (very well covered as it is by earnings and FCF)... forward P/E down to around 11.5x... FCF yield (most recent FY) up above 8%! These are screaming Strong Buy to me - again, in both absolute terms and relative (still) to BATS. And they probably will too, to any prospective trade predator...It is a febrile, nervy market indeed, as if we needed further proof of this, so I can at least understand the hasty reaction... even if I think it wrong-headed. And as always, I have Uncle Warren's wise words ringing in my ear... the market can stay irrational longer than you can stay solvent! But still, for anyone thinking medium term and beyond, it's a compelling opportunity IMHO."__________ __________ _And for completeness, the valuation figures for BATS down here: prospective divi yield 3.8%, forward P/E 16.8x... FCF yield 3.9% (most recent historic). I suppose, if IMB is a Strong Buy for me than there must be some sort of case for BATS here... but still much weaker for me.
gamesinvestor
31 Jul 2017
Re: Overdone "but I don't see the big deal and quite why the tobacco shares have been whacked quite so hard."charlus, It's a lot to do with sentiment. Your arguments are probably sound and it's happened before, but then you might argue that the price when high was also largely based on belief and sentiment to a degree.Games -- IG Group up 4.03%, BATS down 4.43% -- Phew!!!! - escaped!
charlus
31 Jul 2017
Overdone The US is about a sixth of BATS revenue (I believe this excludes the impact of acquiring the remains of Reynolds that it did not already own). It is a declining market and has been for years.The US regulator may do something to reduce nicotine content.I may be missing something, it wouldn't be the first time, but I don't see the big deal and quite why the tobacco shares have been whacked quite so hard.Expect a swift recovery.GLA Chozza
Bill1703
30 Jul 2017
Millions dependent on tobacco - for income From the Telegraph today:"In the income-starved era since the financial crisis, tobacco stocks have doubled their share of total FTSE 100 dividend payments. In 2007, tobacco firms accounted for 3.5pc of the total income distributed to the shareholders of Britain’s biggest companies. The figure peaked at 6.6pc in 2010 and today is 6pc. At the same time, the total dividends paid out by FTSE 100 companies have risen from £50bn in 2007 to £74bn last year, according to data from broker AJ Bell.This shows how tobacco firms have first grown – and then maintained – their revenues and distributions, and their soaring share prices across the period are a testament to investors’ gratitude. Even if you do not directly own shares in Britain’s two biggest tobacco firms – British American Tobacco and Imperial Brands – you are quite likely to have exposure via pensions, Isas or other funds. Currently, 47 out of the 84 funds in the UK Equity Income sector (encompassing the most popular funds) own either or both BAT and Imperial Brands as a top 10 holding.Darius McDermott, of broker Chelsea Financial Services, said: “This is for good reason. The big threat of litigation has mostly passed, and cigarette companies are still managing to grow profits, have cut costs and have no hefty advertising budgets. As a result, cash flow is passed back to investors through dividends and share buy-backs. That type of stable income is hard to come by.”Over seven years, BAT and Imperial Brands have returned – through share price appreciation and dividends combined – 210pc and 152pc, respectively, compared with 80pc for the FTSE 100.A concentration on any one sector poses risks, but tobacco, mired in controversy and facing a number of challenges, is a special case. The most recent blow came on Friday, when the US Food and Drug Administration (FDA) took aim at the industry, announcing a plan that aims to lower nicotine in cigarettes to non-addictive levels.Tobacco firms may be profitable but, in the developed world at least, smoking rates are declining sharply. In 2000, one in four Britons over 16 smoked. Now, that is down to 16pc. In the US, the adult smoking rate declined in an almost identical pattern. So tobacco companies’ hopes are on new markets. Last year, 54pc of BAT’s revenues came from Eastern Europe, the Middle East, Africa and Asia-Pacific.Over time, smoking rates typically drop as societies develop. For instance, in India, the world’s second biggest cigarette consumer, adult male cigarette use declined from 36pc in 2000 to 20pc in 2015, according to World Health Organisation (WHO) data. Adult female use fell from 7.3pc to 1.9pc. Worldwide, the adult female rate declined from 11pc in 2000 to 6pc in 2015 – for men, the fall was from 44pc to 35pc. But those global declining smoking rates do not mean that total sales are falling.Population growth, especially in countries with young populations, could support continued growth in cigarette sales, the industry hopes. Even so, most commentators believe in “peak tobacco” – the point at which total consumption starts to decline. In China, the world’s largest consumer of cigarettes with 300 million smokers, it was reported by the WHO last year that total sales had fallen for the first time in decades.Another area of potential revenue growth is in e-cigarettes, where traditional tobacco companies are heavily investing in the hope of replacing traditional revenues. E-cigarette use is growing. In Britain, use rose by 24pc between 2015 and 2016, according to Office for National Statistics figures. A study published in the British Medical Journal last week found evidence linking e-cigarette use to people successfully stopping smoking. This effectively reaches a new market of “quitters”.As e-cigarettes are comparatively cheap, there are hopes of higher sales volumes. There are also much lower barriers to entry in the e-cigarette market, however, meaning tobacco firms won’t enjoy
Bill1703
29 Jul 2017
FT article on FDA announcement From yesterday - full text below:"The US is considering capping the amount of nicotine allowed in cigarettes at a level that is not addictive, in a move that could strike a serious blow to the business model of big tobacco. Shares in tobacco stocks tumbled on Friday after the unexpected announcement by the Food and Drug Administration, which has had the authority to regulate cigarettes in the US since 2009. “Envisioning a world where cigarettes would no longer create or sustain addiction, and where adults who still need or want nicotine could get it from alternative and less harmful sources, needs to be the cornerstone of our efforts,” said Scott Gottlieb, who was appointed FDA commissioner this year by President Donald Trump.The FDA move would be a significant new turn in the public health debate over cigarettes. Tobacco companies have endured decades of costly litigation in the US over claims that their products sickened or killed users. Tobacco use remains the leading cause of preventable disease and death in the US, causing more than 480,000 deaths every single year, according to the FDA. The agency said it would begin soliciting public comment on the benefits — and any potential dangers — of limiting nicotine levels to non-addictive levels.Shares of US-based Altria, the maker of the Marlboro and Parliament brands, fell as much as 18.8 per cent before paring back the losses to trade down 9.5 per cent at $66.94 at the close on Friday. British American Tobacco — which recently paid $49.9bn to acquire Reynolds American, with brands like Camel, Newport and Pall Mall — plunged nearly 14 per cent before bouncing back to close 6.8 per cent lower at £49.60 in London. UK-based Imperial Brands was down 3.8 per cent at £33.15. A spokesperson for BAT said the FDA’s comments regarding nicotine did not come as a surprise. “We are well prepared and look forward to participating in a thorough process to develop a comprehensive plan for tobacco and nicotine regulation.”Altria said it would be “fully engaged” throughout the regulatory process. Any proposed nicotine rule “must be based on science and evidence, must not lead to unintended consequences and must be technically achievable,” the company said in a statement. contrast, shares of 22nd Century Group, a US-based biotech company developing low-nicotine products, rose 20.7 per cent on the news to $1.75. Philip Morris International, which sells products outside of the US, fell 7.5 per cent before quickly recouping those losses, ending the day up 0.3 per cent at $118.51. Tobacco has remained a multibillion-dollar business despite rising sales taxes, declining smoking rates and increasing regulatory scrutiny, thanks to customer loyalty cultivated in part by cigarettes’ addictive properties. The multinational companies have also endeared themselves to investors by paying rich dividends, and have broadened their scope in recent years to include more non-traditional products such as electronic cigarettes. They have also pursued sales in emerging markets like China and Russia. It will take time for analysts to weigh the implications of the FDA’s proposal on the companies’ long-term valuations, as any concrete plan could take several years to come together — if it does at all. The agency has nevertheless sent a clear signal about regulators’ continued interest in stamping out tobacco disease and death, said Neil Wilson, senior market analyst at ETX Capital. “This is just the US regulator acting but we can easily see others, particularly in Europe, where regulatory pressures are already extremely high, following suit,” Mr Wilson said in a note. Mike van Dulken, head of research at Accendo Markets, was more sanguine, saying the sharp moves could be an overreaction. “It might not sound great, but it doesn’t read like the industry is destined to go up in smoke,” Mr van Dulken said. "
Bill1703
29 Jul 2017
Re: reduced nicotine (as already posted on the AZN board):I don't see this changing much at all. The US (like the UK) is a mature, declining market for the big tobacco stocks - some 20% for IMB (used to be a lot less, sadly), and a bit more I think for BAT (haven't checked)... they spend very little on marketing, etc, there and it's a nice free cash generator, but all the growth - and focus - is in emerging markets.So maybe this will see some acceleration of the existing, well-established trends in the US.. steady decline in smoking, increased uptake of alternative options (e-cigs, etc). But will most likely be gradual, incremental... the greatest emphasis is on stopping younger people from starting smoking, but again, that is nothing new. Hard to quantify, but 4-7% off SPs seems excessive - the tobacco companies have, time and again, shown their capacity to adapt and evolve, and this is hardly a game-changer in this, one market. It comes down to whether you see (saw) them as good value in the first place... IMB definitely, for me, BATS much less so (as per recent posts).
Geminic
29 Jul 2017
reduced nicotine Surely if the nicotine content of cigarettes is reduced, the initial effect should be incresed consumption as smokers try to satisfy their nicotine habit.The share price should have risen!
IAmShareCrazy
28 Jul 2017
Re: Director I would worry there has been a big sell off of shares volume wise!
Bill1703
28 Jul 2017
Re: Director "Woody of course sold his BATS - though he still has his IMB, which is down pretty much the same, though I thought they had quite a bit less US exposure?"IMB recovering somewhat as I write - down only c.4% now, BATS still nearer 7% - sounds a bit fairer to me.I might have to buy some more IMB... overreaction, most of the yanks that still smoke, will still smoke... and it might just flush out that bid, from Japan Tobacco, or whomsoever... Anyone??
Lupo di mare
28 Jul 2017
Re: Why the fall... Did I write, "who"?
