☀☕ Vaping… Another Puff for Altria (Big Tobacco)

Happy Tuesday!

Market Roundup 📊 07-Mar-23

US large-cap S&P 500 closed 0.07% UP ▲
Tech-heavy Nasdaq Composite closed 0.11% DOWN 🔻
Pan European STOXX Europe 600 closed 0.02% DOWN 🔻
HK’s Hang Seng Index closed 0.17% UP ▲
Japan’s Nikkei 225 closed 1.11% UP ▲

— The MoneyFitt Morning (@MoneyFitt)
Mar 7, 2023

📝 Focus

Vaping… Another Puff for Altria (Big Tobacco)

📊 In the Markets

Doesn’t Really Matterhorn (Toblerone, Mondelēz)

EV-ery day low(-er) prices (Tesla, BYD)

📖 MoneyFitt Explains

🎓️ Free Cash Flow

📝 Focus

Vaping… Another Puff for Altria (Big Tobacco)

Altria, the maker of Marlboro cigarettes in the US, is buying an e-cigarette start-up called Njoy for US$2.75 billion, almost back-to-back with exiting its 35% stake in vaping company Juul at a 98% loss within 5 years. The deal means Altria gets full global ownership of NJOY’s ACE, the only FDA authorised pod-based e-vapor product.

The chicken thinks vaping looks cool, too
– Image credit: Tenor

► The exit from Juul was valued at $250mn in return for intellectual property rights in Juul’s heat-not-burn prototypes (HNB, which Juul never actually launched, and may result in nothing for Altria anyway.) The stake in Juul was bought for $12.8bn in Dec-2018 and was supposed to bring vaping and then HNB tobacco products to American consumers… some of whom might actually be adults who happen to want flavours like ​​mango, fruit medley, cucumber and crème brûlée. The “sale” comes after Juul’s $440mn settlement last September with 33 states over lawsuits alleging it fuelled a teenage “vaping epidemic” by “cynically” advertising vaping products to underage users, manipulating the chemical composition to be palatable to them and misleading everyone about nicotine content and addictiveness. The US Food and Drug Administration banned Juul’s products though the products remain on shelves for now and the settlement will only be paid over 6-10 years.

That’s the idea, isn’t it?
– Image credit: Njoy (on website)

► After all these years of proven health risks, immense cost to public health systems, declining consumption per capita and gigantic settlements, how have cigarette companies not been driven entirely out of business? Unfortunately, it turns out that they are generating loads of cash. Advertising, formerly a massive cost for them, is now widely banned — but marketing budgets targeting lucratively vulnerable groups remain in the billions. And luckily for them (the companies, not the consumers), the highly addictive nature of their products generates high profit margins despite ever steepening taxes. Altria’s operating profit margin is close to 60%.

► This strong steady free cash flow 🎓 combined with avoidance by investors-with-a-conscience means that investors-WITHOUT-a-conscience can cynically get both stable and high dividend yields (meaning the dividend as a percentage of the share price.) Altria has paid out 7.9% of its current share price in dividends over the last year, while its international twin-separated-at-birth Philip Morris International paid 5.1%. (It was spun off in 2008 to pursue higher growth in less regulated and possibly more malleable international and emerging markets, leaving Altria to milk US consumers. PM is now the world’s largest tobacco pusher by market value.) Rounding out Big Tobacco’s traditional Big 5, British American Tobacco, Imperial Brands and Japan Tobacco are expected to yield 7.4%, 7.0% and 6.8%.

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📊 In the Markets

US and European stocks were little changed after sliding into the close as investors dithered ahead of Fed chair Jerome Powell’s semiannual monetary policy report before the Senate Banking Committee at 10am on Tuesday, which will be followed by the same thing in front of the House Financial Services Committee on Wednesday.

It’s widely expected that he will continue to say that the central bank has more interest rate hikes to deliver and that they will likely be held there for quite some time before inflation conclusively comes under control. If he says words to the effect of “higher-for-longer” again, there’s actually a chance that traders won’t utterly freak out, having spent all February digesting the idea.

More important will be the February employment report from the Labor Department on Friday morning. After January’s blowout report, with 517,000 new jobs, highly-paid experts are expecting a slowdown to just 200,000 new jobs created in the month and unemployment unchanged at 3.4%. (On the other hand, those same highly-paid experts were expecting just 187,000 in January.)

Doesn’t Really Matterhorn

Toblerone, Mondelēz’s delicious Swiss almond-and-honey chocolate staple of duty-free shops worldwide, is being forced to change its iconic design under “Swissness” marketing restrictions relating to the use of Swiss iconography. The image of the almost symmetrical Matterhorn mountain peak will disappear from Toblerone packets and get replaced by something like it… but not it, after some Toblerone production gets moved to Slovakia.

Soon to be “Established in Switzerland.” Spot the bear!
– Image credit: Hans from Pixabay

► Theodor Tobler named his chocs Toblerone by merging his name with the torrone, a toasted-almond nougat confection, and has been produced in the Swiss capital, Berne, since 1908. The city’s heraldic animal, a bear, is hidden in the Matterhorn’s image on the packaging. It’s been owned since 2012 by US snack food giant Mondelēz (formerly Kraft Foods, which also owns Cadbury’s, Ritz crackers, Oreos and Philadelphia Cheese.)

► In 2016, even before the recent round of shrinkflation, Mondelēz outraged consumers when it increased the gaps between Toblerone’s triangular chocolate chunks in the UK to sell less of it at the same price. A year later, they cut the weight AND the number of chunks in Germany. Risky business, playing with one’s favourite chocs, unless the “outraged” headlines were just a savvy marketing move to grab headlines before a return to previous shapes.

E.V.ery day low(-er) prices

Elon Musk said at last week’s yawn-fest Tesla strategy day that recent global price cuts had stoked demand, and days later, he’s cutting the prices on its two most expensive electric vehicles, Models S and X, by between 4% and 9% globally. This is now Tesla’s fifth cut since the start of the year.

► In perspective, Tesla did jack up prices aggressively in 2021 and 2022 in the face of parts shortages and long waiting lists, and fuelled a second-hand Tesla frenzy that supported further hikes. And it did so while continuing to build out its capacity worldwide and therefore drive down per unit costs due to greater economies of scale. In December and January, as weaker demand and rising competition ate into sales, Musk started using his cost advantage to effectively initiate a price war (flagged in a mid-Jan MFM) to hit his 2 million vehicle target for 2023. Feeble sales at its much smaller peers (see MFM Focus story 2 weeks ago) may be the result of this or perhaps just generally soft demand from buyers waiting for more cuts.

CEO Elon Musk offering discounts to potential Model X buyers
– Image credit: Our Gang (Little Rascals) / Hal Roach, WBD via Tenor

► Meanwhile, out in China, Tesla’s second biggest market after the US, the price war among EV makers seems to be taking its toll on the share prices of even the players with the greatest economies of scale, as investors worry about the price war getting out of control. The largest EV carmaker is BYD (a portfolio company of Warren Buffett’s Berkshire Hathaway) which in addition to scale has control of most of its supply chain by producing its own chips and batteries. The concern is that after Nio and XPeng followed Tesla’s cuts, more and more buyers will hold back, awaiting even lower prices, which will dry up demand further… prompting the bigger players to use their cost advantages and fat margins to cut further. And further. And…

📖 MoneyFitt Explains

🎓️ Free Cash Flow

Cash flow refers to the actual flow of cash in and out of a company. It is an important measure of a company’s financial health and its ability to pay its bills and make payments on its debts.

A company can have negative accounting profits but positive cash flow, and vice versa. Accounting profits refer to the amount of money that a company makes according to its financial statements. This amount is calculated by subtracting a company’s expenses from its revenue. Some expenses are not paid in cash, such as depreciation or stock-based compensation, so accounting profits do not always reflect a company’s actual cash flow.

Free cash flow (FCF) takes into account the cash available to a company after paying expenses while also allowing for capital expenditure spending. This shows its ability to generate enough cash to pay off debts, make dividend payments to shareholders, or invest in new opportunities. A company with positive FCF is generally considered to be financially healthy.

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