[lbo-talk] Tobacco (stems from socially irresponsible investment)

John Bizwas bizwas at lycos.com
Sat Apr 16 09:47:07 PDT 2005


Hmmm...when the guy in the GoF song says, 'Oh no, I left it in my other suit', did he mean his credit card or his cigarette lighter?

I did a bit of online searching about and reading on tobacco, and here is what I've come up with. The advice about tobacco being an over-performer might be passe'. The latest word is that anti-tobacco laws and declining consumption are taking a toll. Or so a J.P. Morgan analyst predicts (see the second BW piece cited and excerpted below--i.e., after four years of overperformance, global tobacco will underperform).

Business Week was lauding that 'sinful' investment fund before the Reuters piece that just got posted on the list, as the cited and excerpted BW piece is from Sep. last year. After these are excerpts about Japan from Japan Times (JT though means Japan Tobacco). The JT piece on JT and Marlboro will help explain about the importance of premium brands.

F

http://www.businessweek.com/bwdaily/dnflash/sep2004/nf20040914_2454_db006.htm


>>Q: What are your top holdings in tobacco?
A: Altria (MO ) is in our top 10. As I mentioned earlier, I think people don't realize the huge worldwide business that they do, and many people forget that Altria also owns Kraft and Nabisco. A couple of other favorites are British American Tobacco (ETI ) and Imperial Tobacco (ITY ). Now, because these are foreign stocks traded in the U.S. as American depositary receipts, they're off the radar screen of many U.S. investors. They have very little of the litigation and regulation problems that we think of in the U.S., but they still have the huge profit margins, a large dividend, and the huge worldwide demand for tobacco.... I bet very few investors in the U.S. would realize that Reynolds American (RAI ) (the former R.J. Reynolds) has returned over 100% in the past 12 months.>>


>>So far, however, cigarette makers' profits are holding up, largely because tobacco concerns typically raise their prices when volume decreases. "Could [the government initiative to discourage smoking] affect volume? Yes. Will it affect profit? No," said David Adelman, an analyst with Morgan Stanley in New York. >>

http://www.businessweek.com/bwdaily/dnflash/jan2005/nf20050119_8115_db039.htm


>>What's still unclear, however, is how the smoking ban will affect tobacco companies' bottom line. As governments in Western Europe crack down on smoking through initiatives ranging from bans to higher taxes, cigarette makers have so far been largely unaffected by the changes. Yet some analysts say the cumulative effect of these measures may start to catch up with the enormously profitable tobacco concerns soon.

Michael Smith, analyst with J.P. Morgan, predicts that the stocks of global tobacco players are entering a year-long period of 10% to 20% underperformance, after outperforming the market for four years. Although litigation remains a risk, he writes, "regulation is becoming a key driver of cash flow." >>

http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?nb20050118a1.htm


>>'REDUCED ODOR' SMELLS LIKE DESPERATION
JT continues to saturate cigarette market

By TAIGA URANAKA Staff writer

Japan Tobacco Inc. unveiled six new cigarette products Monday, bringing the number of product launches in fiscal 2004 to a record 18. The aggressive product offensive is part of the former state monopoly's bid to survive in a shrinking domestic market. It was privatized 20 years ago, but the government still holds a controlling stake.

The new cigarettes will be introduced next month. The previous record -- 14 new products -- was reached in fiscal 2003. Only four were released in fiscal 2002.

"Among the 60 best-selling cigarette brands (on the domestic market), three are replaced every year on average," Yasumasa Matsunaga, JT's senior executive vice president, told a news conference.

"On the other hand, the success rate of new products is about 30 percent. So we would like to secure the three" by launching many new products annually, he said.

JT officials said the recent surge in new rollouts can partly be attributed to a change in the firm's marketing strategy; JT has switched to launching new items without test marketing.

JT hopes to expand its domestic market share of 73 percent by deploying a variety of products in succession.

Japan's smoking population has been steadily declining due to heightened health awareness. An annual JT survey found that the proportion of smokers fell to a record 29.4 percent in 2004.

The company also faces a more immediate concern: It has to come up with popular brands to make up for the loss of Marlboro at the end of April, when the license contract with Philip Morris International will end.

JT has been producing and selling the Marlboro brand since 1972. The Marlboro family accounted for a little more than 12 percent of JT's total domestic cigarette sales volume for fiscal 2003.

Matsunaga said JT cannot avoid a decline in sales immediately after the Marlboro handover. But he said he is confident that JT will make up for the loss within a few years.>>


>>The new lineup also represents a pricier category for JT's cigarettes; all but one brand are priced at 300 yen a pack or more. The company hopes to offset a volume decrease by selling more of such "premium" cigarettes.>>

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