Here are a few differences between $BATS (+0,4 %)
$MO (-0,93 %) and $PM (-0,31 %) and why I opted for BAT.
Disclaimer: I've tried to be as brief as possible here, I'm happy to answer questions on specific points. If I have forgotten something, please let me know.
First of all, I think most people know that Altria is Philip Morris USA, so Philip Morris International does not sell cigarettes in the USA (the most important cigarette market).
How is the cigarette market divided?
BAT sells its cigarettes worldwide, there is a division in terms of brands, but that is basically irrelevant. In the USA you can't compete with Altria's brands, in the global market you are just behind Philip Morris International.
Thanks to its strong brand, Altria has a monopoly-like position in the US cigarette market and therefore has pricing power. Altria sells exclusively on the US market.
Philip Morris International is the global market leader (excluding the USA).
This is also the main difference between the companies in terms of their main business. This will change in the future, especially for Altria, as Philip Morris Int. becomes active in the US market.
How will the position of the companies develop in the future?
All three are struggling with falling cigarette sales figures. Even though this is a global trend, the dwindling US market is the most significant.
The US market is particularly essential for Altria, as this is its only sales market for cigarettes. The US market is also very important for BAT, but the slump here is much easier to cope with as the company operates globally. Philip Morris Int. has no problems with this as they operate exclusively outside the USA. Outside the USA, the number of smokers is also steadily decreasing, but not nearly as dramatically. It can therefore be assumed that Altria will have significantly more problems with dwindling cigarette consumers in the future, while BAT and Philip Morris will make use of the global market.
To compensate for these losses, the tobacco giants have expanded their product range in recent years. But who will manage the transformation and continue to generate massive profits in the future?
Philip Morris Int. is probably the most advanced here, already generating ~ 1/3 of its sales with alternative products. The leader here is their heated tobacco product IQOS, which dominates the global market. They bought back the distribution rights for the US market from Altria at the end of 2023. With the acquisition of Swedish Match, Philip Morris Int. bought into the US oral tobacco market, which they now dominate with Zyn. Vapes are negligible here, as the focus is primarily on heated and oral tobacco.
BAT is the world market leader in vapes with VUSE. They are also excellently positioned in the oral tobacco segment with Velo/Lyft, even if they have not yet been able to really gain a foothold in the USA, Velo is showing strong growth worldwide. In the heated tobacco segment, they cannot compete with the dominance of IQOS. BAT's alternative products will become profitable for the first time in 2024.
In order to diversify further, Altria acquired large stakes in JUUL (vapes) and Cronos (cannabis), which are almost total losses. The JUUL shares have since been sold. In order to enter the vape business, Altria acquired NJOY last year, which is not yet on the market. Oral tobacco, which is marketed under the ON! brand, has not been very successful so far. The heated tobacco products will in future be sold in partnership with Japan Tobacco.
It is becoming apparent that Philip Morris Int. will dominate the heated tobacco market and BAT the vape market. These two are also likely to share the global oral tobacco market. Whether and how Altria can maintain its position in the US market is difficult to say. It almost seems as if Altria has slept through the turnaround, especially as they are most affected by the dwindling number of smokers, it is inexplicable to me why it has taken so long. Philip Morris Int's entry into the US market with IQOS and Zyn will also hamper Altria's growth in the long term, as customers are being lured away on a massive scale. For the first time, Altria is in a position where it has no pricing power.
Why I decided in favor of BAT
- Attractive price
- More attractive dividend payout ratio than Altria
- Clear and targeted strategy for the future
- I assume that vapes will prevail against heated tobacco, BAT is the world market leader with VUSE.
Why not Altria
- too much focus on the US market
- too much stagnation
- Dwindling pricing power
- Too many wrong decisions by management
Why not Philip Morris international
- Valued too high
- Too focused on the end of cigarettes
- Don't see heated tobacco as the future of nicotine consumption
Who you choose depends largely on whether you see vapes or heated tobacco as the future of the nicotine industry. In the oral tobacco market, PM and BATS are on a par. But there is something else that is interesting about PM: its health and wellness division could provide a surprise or two in the future.
If PM approaches the 10 P/E ratio, I will consider adding it to my portfolio.
It will be really interesting if far-reaching bans on illegal vapes are enforced, as these are responsible for a huge loss of sales.
In the long term, I can certainly see the possibility of Altria being bought up internationally by Philip Morris or a merger being agreed. Even though the issue was only taken off the table a few years ago, I assume that sooner or later an agreement will have to be reached due to the growing competition between the companies. Should this not be the case, a merger between Altria and Japan Tobacco cannot be ruled out, as both have already joined forces on the heated tobacco product. If the product becomes the primary operating business for both in the future, a merger would be the best solution.
If BAT were to buy back the Russian business, this would certainly mean a leap in sales. This could also provide a major boost to Velo/Lyft sales, as Velo is particularly popular in Eastern European countries.
BAT itself also has an almost 30% stake in ITC. ITC is an Indian conglomerate that also sells cigarettes, among other things. This gives it a share in a rapidly growing market in which the demand for nicotine products is also steadily increasing. India will also be a large potential market for Velo/Lyft in the future.
Imperial Brands $IMB (-0,58 %) and the other smaller companies will be bought up sooner or later, as the market is likely to become increasingly concentrated on PM and BAT.
To what extent the legalization of cannabis could be a goldmine is still written in the stars.
Fun fact by the way, Altria is one of the best stocks of all time.
