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Last week, I had the pleasure of interviewing Devin LaSarre — author of the Invariant newsletter — on the state of the nicotine market. If you have any interest in nicotine or tobacco, you need to subscribe:
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After publishing our episode with Devin and reading through Phillip Morris International’s Q1 earnings, my thoughts have further crystallized on the company.
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If you’ve owned Phillip Morris International (PM) for the last 10 years, the results have been lacking. In fact, it has gotten much worse in the past 5 years when the stock’s total return started to greatly underperform the S&P 500:
(Courtesy of our friends @finchat.io)
I think this underperformance is set to reverse in the next 10 years.
Phillip Morris’s combustibles revenue (i.e. cigarettes) has remained stable since September 2020:
Since this revenue stability is coming along with volume declines, earnings from combustibles have risen and should remain stable even if volume declines accelerate around the globe. I would bet on a lot of cash getting thrown off by the international combustibles business in the next 10 years.
PM’s reduced-risk products continue to shine, with revenue growing at a 22% rate since September 2020:
At $13 billion in revenue, PM has established itself as the premier nicotine RRP business in the world. As it takes market share (from itself and others) in the coming years, it seems likely that this segment will hit $20 billion in revenue and eventually pass the combustibles segment in size.
The unit economics for RRPs should be similar to combustibles, if not better. Zyn nicotine pouches in the U.S. have better unit economics, but I am not sure how confident I am this holds up over the long term or across the other product categories.
Either way, what matters is that PM will have its combustibles business generate a lot of cash in the next decade — probably over $100 billion in total — while building another business in RRPs that is well on its way to generating $10 billion in annual earnings.
Today, you can buy PM for a market cap of $150 billion and a dividend yield of 5.5%.
I think it will prove very difficult for investors to lose money owning PM over the long term at these prices. Which is why it remains in the top 5 of stocks I want to buy once I get more cash into my account.
Hope everyone has a great week, and thank you for listening to Chit Chat Stocks!
- Brett