Really great article, thank you for writing it. My hope is that BAT use excess FCF to pay off some of the near term debt rather than refinancing it at higher rates and then use the saved interest expense to buyback shares.
Thanks, Oli. I think your hope is the mostly likely path for now, at least until the company passes under the midpoints of their target net leverage range. As always, prudent capital allocation will come down to where rates are, where their notes are trading, and where shares are trading, along /w the health of the underlying operations.
I feel like the next gen nicotine product industry is going to be an out and out dog fight between these two. Do you feel like there’s room for them both to have healthy moats and high returns? Philip Morris not being in the US whilst BAT is feels significant
I think the majority of the profit pool will be split amongst the majors - similar to legacy combustibles. Regulatory hurdles will create a difficult bar for new entrants, and products such as HTP also need significant economies of scale. It's important to recognize that across geographies, different products will fare better/worse. It won't be a winner-takes-all situation. Favorable RRP taxation dynamics + limited competition can certainly help ensure continued supernormal returns.
Good writeup. I feel like this industry offers relative safety in a very uncertain environment, and PMI's management in particular seems to always be a step ahead. Between a US rollout of iQOS and the Swedish Match acquisition there's a real under the radar growth story playing out here in an industry that many investors have written off.
Thanks, Geoff. And I generally agree. There are multiple growth stories surrounding something most have written off as secularly doomed. It still amazes me how few people are aware of the specific next-gen products. The next few years will be very interesting as the space evolves.
Great write-up! Thanks for sharing all that work and in such detail. We recently took a look at tobacco stocks due to their stellar returns against the declining use of their traditional product. It’s a fascinating case study and we believe it could play out in another out-of-favor sector. Coal.
Thanks for your thoughts, Six Bravo. I am not well versed in commodities, but I agree that there are stark parallels between the two. Coal, unloved, is an absolutely necessity for certain applications, and one with no alternative.
BTI is must massively underpriced. BTI is an excellent company with solid management. It has made tremendous progress in NGP’s. I believe BTI is very likely to be able to grow profits in the 5%-8% annually on average over the next several years. BTI is taking the debt to significantly below manageable levels. There is absolutely nothing broken in BTI’s story. Mr. Market is being crazy with the stock. I would not consider BTI even fully priced until it hit PE15 or $70 on 2023 projected EPS. That’s right, that means BTI is priced at exactly 1/2 of full value. You can right now buy 2 shares for what 1 share should cost at retail.
Thanks for your comment, David. I appreciate the enthusiasm. I am long the name, but remain guarded as there are many uncertain dynamics around NGPs longer-term. With that said, I think the equity is compelling. As you can see in my own model, I make several conservative investments including not factoring in BAT's ITC stake and still come to an appealing result.
Really great article, thank you for writing it. My hope is that BAT use excess FCF to pay off some of the near term debt rather than refinancing it at higher rates and then use the saved interest expense to buyback shares.
Thanks, Oli. I think your hope is the mostly likely path for now, at least until the company passes under the midpoints of their target net leverage range. As always, prudent capital allocation will come down to where rates are, where their notes are trading, and where shares are trading, along /w the health of the underlying operations.
I feel like the next gen nicotine product industry is going to be an out and out dog fight between these two. Do you feel like there’s room for them both to have healthy moats and high returns? Philip Morris not being in the US whilst BAT is feels significant
I think the majority of the profit pool will be split amongst the majors - similar to legacy combustibles. Regulatory hurdles will create a difficult bar for new entrants, and products such as HTP also need significant economies of scale. It's important to recognize that across geographies, different products will fare better/worse. It won't be a winner-takes-all situation. Favorable RRP taxation dynamics + limited competition can certainly help ensure continued supernormal returns.
Good writeup. I feel like this industry offers relative safety in a very uncertain environment, and PMI's management in particular seems to always be a step ahead. Between a US rollout of iQOS and the Swedish Match acquisition there's a real under the radar growth story playing out here in an industry that many investors have written off.
Thanks, Geoff. And I generally agree. There are multiple growth stories surrounding something most have written off as secularly doomed. It still amazes me how few people are aware of the specific next-gen products. The next few years will be very interesting as the space evolves.
Great write-up! Thanks for sharing all that work and in such detail. We recently took a look at tobacco stocks due to their stellar returns against the declining use of their traditional product. It’s a fascinating case study and we believe it could play out in another out-of-favor sector. Coal.
https://specialsituationinvesting.substack.com/p/a-coal-royalty-company-natural-resource#details
Thanks for your thoughts, Six Bravo. I am not well versed in commodities, but I agree that there are stark parallels between the two. Coal, unloved, is an absolutely necessity for certain applications, and one with no alternative.
Yep, that’s basically the thesis.
Thanks for your work. We’ve enjoyed what we’ve read so far!
BTI is must massively underpriced. BTI is an excellent company with solid management. It has made tremendous progress in NGP’s. I believe BTI is very likely to be able to grow profits in the 5%-8% annually on average over the next several years. BTI is taking the debt to significantly below manageable levels. There is absolutely nothing broken in BTI’s story. Mr. Market is being crazy with the stock. I would not consider BTI even fully priced until it hit PE15 or $70 on 2023 projected EPS. That’s right, that means BTI is priced at exactly 1/2 of full value. You can right now buy 2 shares for what 1 share should cost at retail.
Thanks for your comment, David. I appreciate the enthusiasm. I am long the name, but remain guarded as there are many uncertain dynamics around NGPs longer-term. With that said, I think the equity is compelling. As you can see in my own model, I make several conservative investments including not factoring in BAT's ITC stake and still come to an appealing result.