http://seekingalpha.com/article/3990395-makes-altria-great-investment
Summary
Tobacco has traditionally been one of the best industries to invest in, but will it always be?
Altria’s domestic focus keeps it insulated from currency swings.
It also protects it from an even more insidious threat.
Diversification becomes even stronger if BUD deal closes.
Shares are likely overvalued, what to do?
Bryan Burrough and John Helyar’s book about the leveraged buyout of RJR Nabisco, Barbarians at the Gate, is one of my favorite books. There’s a scene where then CEO of Salomon Brothers, John Gutfreund, asks Warren Buffett for some advice on whether or not he should pursue a bid for the company. Buffett responded with the following wisdom:
I’ll tell you why I like the cigarette business… It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”
This probably holds true today, but things change with time, and time could be running out for “Big Tobacco”.
About that brand loyalty…
It’s hard to be loyal to a brand when a government squashes said brand. The Australian government has already instituted “plain packaging” laws, therefore destroying any tobacco company’s ability to differentiate their product. If this was a totally global practice, it would likely be hard to profitably compete in an industry defined by monopolistic competition – where brands and differentiation are the biggest competitive advantages.
Philip Morris International (NYSE:PM), which was spun-off from Altria (NYSE:MO) along with (ironically) some former Nabisco brands, is facing major headwinds from currency fluctuations in the short-term. These headwinds will likely abate at some point, but I think plain packaging is a much more dire threat in the long-term. The plain packaging movement seems to be spreading even in Europe, and apparently Latin America wants to join in, too. The trend is globalizing, and I think this threat should be taken very seriously. Without branding, why wouldn’t tobacco users just buy the cheapest brand?