“There is nothing like tobacco. It’s the passion of the virtuous man and whoever lives without tobacco isn’t worthy of living.”
Key Takeaways
- Tobacco smoking is the world’s leading cause of avoidable premature mortality. Most people confuse the health risks of tobacco with the primary active ingredient, nicotine.
- Since Consumer Staples is one of the best sectors in both Quad 3 and Quad 4, my sector remains fertile territory for long ideas.
- Philip Morris International's (PM) Zyn oral nicotine pouches are the category’s leader and one of the fastest-growing consumer products in the U.S., so much so that demand exceeds supply.
The big picture
Humans have been using tobacco for an estimated 12,000 years. It’s not going anywhere, but we can reduce the negative health effects. Christopher Columbus is credited with bringing tobacco to Europe in 1492. Although he discarded the “dried leaves which gave off a distinct fragrance,” members of his crew were intrigued by the local people drinking the smoke of the leaves. One of the crewmen was the first non-American to take up smoking and was thrown in prison when he returned to Spain with his new habit under the belief that only the Devil could blow smoke from his mouth and nose. Within 80 years doctors began to laud tobacco’s medicinal properties. Within another 50 years the King of England condemned it, the Pope banned it in holy places, and Turkey introduced a death penalty for usage.
Tobacco has had a tangled role in our history, but its future is currently being rewritten to a smokeless future. Tobacco smoking is the world’s leading cause of avoidable premature mortality. Most people confuse the health risks of tobacco with the primary active ingredient, nicotine.70% of adult smoker say they want to quit, but only 15% of Americans who try to quit each year are successful. Earlier this week, British American Tobacco announced its “A Better Tomorrow” vision to actively migrate smokers from cigarettes to smokeless products. Research has shown nicotine use has some potential benefits including cognitive enhancement and stress relief, but the important distinction is that it does not cause cancer.
Macro grind
The conditional probabilities for Q3 are for Quad 3 followed by Quad 4. Since Consumer Staples is one of the best sectors in both Quad 3 and Quad 4, my sector remains fertile territory for long ideas. My top long idea is Philip Morris International (PM), which is transitioning to a smokeless future. The company’s Zyn oral nicotine pouches are the category’s leader and one of the fastest-growing consumer products in the U.S., so much so that demand exceeds supply. Volume growth in Q1 was 80% before being constrained by supply in Q2 to 50% growth. Converting smokers to oral nicotine pouch users has social and lifestyle benefits, but more importantly it saves lives.
Oral nicotine products have been in use in Sweden since the early 1970s. Sweden currently has the lowest prevalence of male smokers in Western Europe and also the lowest attributable deaths to tobacco use. Philip Morris acquired Swedish Match, the maker of Zyn, early in 2023 and growth subsequently exploded.
Philip Morris generates ~40% of its revenues currently from smokeless products and by the end of the decade it projects to be 2/3. Many investors have only considered tobacco companies as either “sin stocks” or high dividend payers. The striking growth in non-combustibles is bringing new attention to Philip Morris, a company with best in class Consumer Staples bonafides, but with a discount valuation. The regulatory environment is the largest risk, but it continues to improve for Zyn and for the time being it limits the competition. PM’s total returns through a combination of low double-digits earnings growth, a 4.5% dividend yield, and several turns of multiple expansion are a Quad 3 & 4 winning formula.
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Our levels
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 3.60-3.79% (bearish)
High Yield (HYG) 78.95-80.19 (bullish)
Investment Grade (LQD) 112-114 (bullish)
SPX 5408-5725 (bullish)
NASDAQ 16,690-18,050 (bullish)
RUT 2089-2255 (bullish)
Nikkei 35,613-37,909 (bearish)
BSE Sensex (India) 81,768-83,902 (bullish)
VIX 14.90-21.91 (bullish)
USD 99.90-101.44 (bearish)
Oil (WTI) 65.95-71.97 (bearish)
Gold 2529-2640 (bullish)
Copper 4.05-4.36 (bullish)
Silver (SLV) 29.01-32.21 (bullish)
Best of luck out there,
Daniel Biolsi
