Folks rown up in the states may not realize a fact:
1. In U.S, there is no big gap between the prices of premium brand and generic brand on cigs;
2. In other part of the world, the price gap between premium brand and generic brand can be as huge as 10 to 1, when the economical weather is bad, oversea people may just downgrade their cigs supply from premium to lower level, they can still afford 1 cartoon per day but
With a low end domestic brand.
3. Forget about Indian, Chinese market - the dominant cigs brands are always local mades, the trend is hard to change.
My two cents.
I disagree with your conclusion.
MO operates in a very mature smokers market. I have no idea how to quantify effect of UST purchase will have on MO's future. It will support the MO div for awhile until the smokeless market matures.
PM operates in a market that will grow at least for awhile.
PM also operates ina market that I do not think obama and the ambulance chasing lawyers can touch.
I own both stocks and am thinking about selling my MO common and buying MO bonds that are paying 9+% interest. I am very concerned that obama will eventually turn the govt focus on domestic tobacco.
The U.S. tobacco market is mature, but it still represents some growth opportunities, while ( comparitive ) Western Europe less so.
The population of the Unites States is growing, albeit slowly -- but the same cannot be said for Western Europe and Japan ( Japan -- where the population is aging, and declining ). New smokers in the U.S. will be created, no matter what "Tobacco Free Kids, Inc." may propagandize, and no matter how much the "AD Council" spends to the contrary. Many immigrants from Southwest Asia ( India, etc. ) and Mexico use tobacco products. Some will drop off; other will continue. Smokeless trends are also strong, and the margins on smokeless are outstanding ( look at some of the old S&P Reports on UST. Margins for chaw exceed that for Lipitor. )
The American market, as said, is nevertheless considered mature, with some growth prospects. It is thus a war of share, with Altria waging market share combat with Reynolds and Lorillard. He who grabs share from the other, naturally, will be the winner, and be the company which exhibits earnings growth: grabbing more pieces of a slightly shrinking pie. This is also why MO supports FDA regulation of the industry, as MO will benefit from such a scheme: preventing new entrants, and restricting advertising further, which is a clear detriment to the second- and third-tier players ( RAI, LO ).
Overall cigarette consumption may decline slowly, but share -- and new product introduction -- is key. Altria, in that regard, is in the driver's seat.
You didn't get my point at all. Probably due to you know little about foreign tobacco market. PM can grow -- that is all you can bet on? But where to grow, how much can they grow and how can they suit new foreign emerging market under this economical crisis? Can you answer any of above question?
Investment needs not assumption but logical thinking and analysis and facing the fact.
I do agree with you buying MO's preferred or bond is even better than MO's common shares. But I doubt Obama is going to do anything to tobacco industry which is what the Federal's income (tax) highly relying on. Adding tax on tobacco is no big deal to domestic tobacco makers, lost 5% volume but with higher income on top of the taxes.
How come PM sales overseas are BRISK according to Goldman Sachs etc: guess what both PM and MO are great companies to own: American Smokes overseas are way too cool for smokers: Pack of REDS is American: this stock has sold-off like a DOG.
NO EVIDENCE of SMOKERS TRADING DOWN as of 30 day's ago. What do you know? PM has traded like a GOAT! The cash-flow on these companies is unlike anything most investors have ever seen.
Actually, the poster has introduced a good point, regarding "local brands," as PMI management has echoed a similar observation.
PMI has not witnessed any material "trade down" effect. That much is true. However, in order for PMI to register growth in the high-population, emerging markets of India, China, Indonesia, Viet Nam and others, TRADE UP must occur. And as the initial poster wrote, during times of economic stress, smokers in these geographies will clearly opt for the inexpensive carton of locals -- which cost far less than the American blend packs offered by PMI. This is why the depth and duration of the current global slowdown/"contained depression" is so critical for PMI in the emerging markets.