Devin LaSarre's avatar

$20.8M follower assets

Strategist, designer, investor.

Robust brands, regulation, and busted narratives. Valuation matters.
$META: Pain and Patience
In 2018, following the Cambridge Analytica scandal, headlines declared Facebook finished. People predicted a mass exodus of users, giant government fines, and new regulations that would choke the business. The viability of the company’s model, and its profitability, would be further weakened by Huge requisite spending on tech and infrastructure to protect user data, ensure privacy, and moderate content.

Those who believed this felt validated when the company released its Q2 2018 results - the first full quarter following the scandal:

  • User growth, while still positive, was slowing.

  • Revenue, while still up significantly y/y, missed analyst expectations.

  • The company was heavily investing in personnel and AI to moderate content.

  • The European Union’s General Data Protection Regulation (GDPR) had gone into effect on May 25th, regulating the way companies process, use, share, and move the personal data they collect from consumers online.

  • There was also a deep concern over Stories, the recently rolled-out product that appeared to be monetizing at a much lower rate relative to the incumbent media it sought to replace.

The company did not mince words when it explained the continuation of these dynamics would cause its operating margin to fall steeply.

The stock tanked.

On July 25th, 2018, the stock closed at $217.50.

On July 26th, it rested at $176.26.

Nearly 19% of the company’s total market capitalization, $119 billion, poof, gone in a single day.

The narrative had been shattered.

What was once the darling of Wallstreet became its punching bag and the butt of every joke. Forget growth. Profitability was permanently impaired! Expenses would continue to balloon, and with the stock price tanking, stock-based compensation was kicked in the teeth and there would be an exodus of talent on pace to match the fleeing users. Or at least, that’s how it all looked to most at the time.

Without investor confidence, the stock continued to grind lower throughout the year, hitting $123.42 on December 24th - a 43% drop from its July high close.

That 2018 period was when I became very interested.

If you’ve read any of my previous work, you might find it odd that I would even look at such a company. I (mostly) explore and invest in things that are mature, old-economy, and not flashy in the slightest, like cigarettes, mouthwash, and elevators. I’ve also never (NEVER) had a personal Facebook or Instagram account. But I appreciate entrenched networks, and I’m especially drawn to assets that others have soured on. Meta (then Facebook) was viewed by most as rancid.

However, with conservative napkin math, I saw something much more palatable. There was no evidence of a user exodus, and it seemed that even with slowing user growth there were plenty of levers to pull to create long-term value. And I didn’t have to be precise. I believed the massive drop in share price more than accounted for people’s fears. This was a company led by a hungry, young founder and was still very profitable, with no debt and lots of cash on the balance sheet. And most people still seemed fixated on the Facebook platform and gave Instagram too little focus. Whatsapp and the rest of the business weren’t part of the dialogue. But more important was a thought I couldn’t shake.


Everyone said it was going to crush the company. I had my doubts. After all, how many politicians are too out of touch to understand what exactly the company does, let alone regulate it? Also, mind you, through third parties, these are also the same people who rely on the company’s platforms for their reelection campaigns. I didn’t think they’d bite the hand that fed them.

But what if I was wrong? What if a tsunami of regulation was coming? That’s when I realized I was probably thinking about this entirely wrong. The world constantly debated if Facebook had any competitive advantages and if so, what they were. It seemed clear that regulation would become one.

Entering a market enveloped by stringent regulations is hard and expensive. Operating in an environment where regulation is being radically overhauled is often more so. For the majority of competitors, it looked like the costs of navigating new rules surrounding data security, privacy, as well as moderating content would become quite prohibitive. But for Facebook, with its size and profitability and seemingly endless resources at hand, it would mostly equate to speedbumps.

What’s happened since then?

Perhaps partly responsible for the rebrand to Meta, the company has continued to face a litany of governmental inquiries, investigations, fines, countless new regulations, accusations, scandals, and awful headlines. Yet, revenue, gross profit, operating income, and net income are all up considerably. Along with this, the stock reached over $380 in September of last year before crashing; falling nearly 70% from its peak and 50% from the July 25th, 2018 close of $217.50 to $111.41 as of Friday.

For context, centered in the black box below is the Q2 2018 drop:

What a difference a few years makes.

To some, it may seem insane that a company can grow at such a rate and experience such a decline in stock price over the same period. To others, it’s clear that not only were lofty expectations previously baked in and unmet, but new threats have also emerged and the narrative has once again been broken. Further fanning the flames have been Meta’s buybacks.

It was not all that long ago when cash on the balance sheet was growing at an astronomical rate, leading the company to ramp up its massive buyback program.

At the end of 2020, Meta (then Facebook) ended the year with $62 billion in cash and marketable securities on its balance sheet and had repurchased $6.3 billion of Class A common stock over the full-year period. With $8.6 billion remaining on its previously authorized repurchase program, it then increased the sum by an additional $25 billion. This was despite the company referencing “significant uncertainty as we manage through a number of crosscurrents in 2021.” The ramp since then has been nothing short of astounding, ballooning to a peak in Q4 2021 and is still chugging along:

Meta's diluted weighted average shares outstanding peaked in Q3 2017 at 2956m. Since then, the total result of repurchases is a reduction in share count of 9.1%. The full effectiveness of the buybacks is obfuscated by the company’s stock-based compensation, which it has largely absorbed. There’s just one slight problem. Over its history, Meta’s average buyback price per share is $253.54, whereas the current share price is $112.05 as of Friday’s close. This was largely due to the massive ramp right before the stock price fell off a cliff.

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United-Guardian: Taking Aim
In my comprehensive report published in September, I described United-Guardian as “the smallest, most profitable company you've never heard of” and said:

"I'm intrigued by United-Guardian. It has a colorful history and many of the hallmarks that make a great business. However, it’s also been hit hard a number of times over the years, and while never out for the count, I’m not sure if it’s a fighter to bet on. UG’s ‘low capital intensity’ may be more of a bug than a feature and paying out nearly all FCF is more indicative that management has been unable to find effective new ways to reinvest in the business."

I concluded the piece by stating at a certain price, I’d likely be a buyer and that there were particular catalysts that could lead me to action. Along with mixed Q3 2022 results, exact such catalysts are forming.

Let’s dive in.

New President and CEO

On October 25th, United-Guardian announced the appointment of a new president and CEO:

Beatriz Blanco looks to be an exceptional choice to head United-Guardian. While her academic credentials are impressive, including a bachelor’s degree in chemistry and pharmacy, an MBA with a marketing focus, and a master’s in chemical engineering from Carnegie Mellon University, her track record truly shines. Ms. Blanco holds over 21 years of experience specifically focused on specialty cosmetic ingredients and personal and home care products, including nearly 5.5 years at ISP (now Ashland Specialty Chemicals, one of UG’s largest partners). Along with enhancing profitability, her skillset is ideal to both foster growth and navigate an extremely challenging macro environment; especially for UG’s cosmetic ingredients - its most sensitive segment.

While no further announcements have been made, I expect Ms. Blanco to make a more comprehensive statement regarding her vision in the annual shareholder letter, if not earlier.

Q3 2022 Results

United-Guardian’s Q3 results were not pretty at first look:

  • EPS for the quarter fell 68% y/y from $0.22 to $0.07.

  • Income from operations fell 46%.

  • Net sales fell by 24% while operating expenses grew by 16%.

All of these numbers are trending opposite of ideal. However, digging a bit deeper provides further consideration. The company experienced a change in the fair value of its marketable securities of -$300,526, equating to a loss per share of $0.065.

Sales for the company’s 4 segments were as follows:

The most glaring change y/y is the drop in cosmetic ingredient sales. However, some relief can be found in the comments of Beatriz Blanco, the new president and CEO, in the Q3 report (emphasis added):

“Our largest marketing partner, Ashland Specialty Ingredients, which is responsible for marketing our products in China, informed us that their sales of our products in the third quarter were adversely affected by the several things, the most significant of which was the continuing impact of the coronavirus pandemic in China. They also indicated that the reduced sales that they experienced in the third quarter was exacerbated by some overstocking issues, especially in connection with one of their major customers switching from one of our Lubrajel formulations to a different one, which resulted in inventory that had to be worked off. They indicated that they are not aware of any significant loss of customers, and anticipate that sales will increase over the coming months, especially as the coronavirus situation improves in China. We remain optimistic that our sales and earnings will improve as the global economy continues to improve, and we are looking forward to a stronger 2023.”

The continued impact of the coronavirus in China was to be expected, though, with recent announcements of reopening, that may begin to subside. The overstocking issue, especially in connecting with an Ashland customer switching product types, was not anticipated, but this is not new in the slightest:

Historically, issues with excess inventory have normalized over the following 1-2 years for United-Guardian. When factoring in the fact that there have been no known losses of key customers, I believe it is likely that cosmetic ingredient sales recover over the next 12-18 months.

On the brighter side, medical product sales increased 11.8% y/y to $384,548 for the quarter and are now up 20.4% y/y to $1,904,424 for the first nine months.

Along with the strength in medical products, pharmaceutical sales were strong, down 4.8% y/y to $1,159,367 for the quarter but growing 3.24% y/y to $3,622,964 for the first nine months. This segment, while still notably smaller than total Lubrajel sales in cosmetic ingredients and medical products, is the one I am most interested in. As I wrote in Mini Monopoly, United-Guardian’s drug Renacidin is surrounded by unique financial and regulatory considerations that thwart competition, allowing the company to generate substantial returns on minimal invested capital.

The setup

When I published my initial analysis on United-Guardian the stock price was $12.48. Last Friday’s close was $12.13. During the interim, the stock has nearly twice reached $11.00.

Along with zero debt and $496,526 in cash on the balance sheet, the company holds $6,656,585 in marketable securities. These marketable securities now make up ~12% of the company’s market cap; making it additionally sensitive to fluctuations in the overall market. I’ve stated before that this microcap receives almost zero coverage or analysis, leading me to believe it’s capable of generating substantial overlooked opportunities.

I can envision the company’s new CEO, with the support of the board, potentially announcing a permanently reduced target payout ratio, aiming to shift capital towards growth efforts. Those holding the stock simply for income may quickly sell. I think it’s also likely that while cosmetic ingredient sales should normalize that it will take several additional quarters before we see it in the numbers (especially if China reverses on reopening). Additional weakness in UG’s share price is likely if either of these things happens. If both happen, especially on top of additional broad market weakness, I could see shares falling substantially.

As illustrated in Mini Monopoly, the NPV of Renacidin’s cashflows could be worth over $20 million alone (3% terminal growth rate + UG cost of equity / higher short-term growth + a 10% hurdle rate). Per the above, this would value the remainder of operations (the majority) at only $11-28 million. To boot, with 0 debt, there is no countdown to destruction. There is also no need for the equity to re-rate to its 5-year average EV/EBITDA multiple of 13.85. Even without a recovery, normalizing current TTM EBITDA and FCF conversion could net a double-digit FCF yield. If/when macro pressures ease, recovering EBITDA and improving margins, along with the new CEO ushering in growth, could make for a radically more positive picture.

Having taken aim, I am still not ready to pull the trigger. While I may never shoot and may miss my chance, I much prefer to exercise discipline and patiently wait for the risk/reward to skew even further to the point I feel compelled to act.

Thanks for reading.

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FTX: Another One Down
So the thing about crypto is that it has no real utility. That lack of utility gets disguised by financialization schemes, and it usually goes a little something like this:

  1. Person A lends to person B

  1. Person B lends to person C

  1. Person C lends to person D

  1. Person D lends to person E

  1. Everyone pats themselves on the back and eagerly points to the thriving ecosystem they’ve built.

  1. No one questions what person E is up to because they’re all earning a ton of interest on their loans.

  1. Person E loses all the money by putting on a 14-leg parlay, a leveraged crapcoin position, or whatever. Or maybe they get hacked or just run away with all the money.

  1. Everyone is sad and wonders how this could have happened.

Of course, none of this is new. This kind of devious stuff has happened for centuries, albeit with less flashy buzzwords and tech. Still, it should never feel weird when things blow up. Yet people are surprised every single time it happens.

Last week, FTX, one of the largest crypto firms in the world, blew up. Again, not weird, especially since earlier this year FTX’s CEO effectively described its operations as a Ponzi scheme in an interview. Here’s a sequence of events:

2014 - Sam Bankman-Fried (SBF), the son of two Stanford law professors, graduates from MIT with a degree in physics and a minor in mathematics.

2017 - SBF founded Alameda Research, a Hong Kong-based private equity firm that looked to arb trade cryptocurrency between exchanges.

2019 - SBF founded the crypto exchange FTX, which quickly grew to be one of the world’s largest.

2021 - FTX Raised $900 million at an $18 billion dollar valuation. Investors included Softbank, Sequoia, Thoma Bravo, Third Point, Coinbase Ventures, and other powerhouses. Later in the year, FTX headquarters moved from HK to The Bahamas.

Jan 2022 - FTX announced a venture arm called FTX ventures, which would deploy $2 billion+. FTX then raised an additional $400 million in a series C round at a $32 billion valuation.

Feb 2022 - FTX ran this dumb ad during the Super Bowl, promoting itself as a ‘safe and easy way to get into crypto.’

July 2022 - FTX bailed out the flailing crypto company BlockFi, which I wrote about:

And then November came about...

There’s a token that FTX issued on its exchange called FTT, which stands for FTX Token but more appropriately should be called Funny Transaction Token. The token’s value is very clearly tied to...

Keep reading at the link below:
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No Pain, No Gain
“In theory, there is no difference between theory and practice. In practice there is.” - Yogi Berra

On April 2, 1993, Philip Morris sent shockwaves throughout the markets by announcing discounting for its flagship Marlboro cigarette, effectively slashing prices by 20% overnight. Caught completely off-guard by the company’s decision that seemingly made no sense, shares of the company sold off frantically, dropping 26%. The day would be remembered as Marlboro Friday.

At the time, Philip Morris faced pressure from a growing number of competitors; especially bargain brands. The company recognized it was ceding market share but also realized that it was in a much better financial position compared to its rivals. It knew that if it dropped its prices in one fell swoop, competitors would not be able to respond in kind. By partially closing the relative price gap, it all but guaranteed that consumers would eagerly select Marlboro.

It worked beautifully.

But it didn’t end there.

Several years later, the Master Settlement Agreement (MSA) was finalized, slamming tobacco companies with the largest legal settlement ever executed in the United States. Once again, headlines and the market reacted in a hopeless fashion, expecting the demise of the tobacco companies. As I’ve written before, that was simply wrong. The MSA brought forth new restrictions on the advertising, promotion, and marketing of tobacco products, largely cementing Marlboro’s market share. Now, the company (now Altria) continues to become more profitable than ever despite historic cigarette volume declines.

Marlboro Friday is often recited. Morgan Housel covered it. Gene Hoots wrote about it and discussed it with fellow tobacco enthusiast Lawrence Hamtil. It’s a favorite tale because it reminds us that what works in practice is sometimes different than what’s taught in theory. More importantly, and what I love most, is that it is also a prime illustration of one often-forgotten fact:

Maximizing long-term results often requires short-term pain.

(This is true in most aspects of life.)

In our current environment, there’s an even greater fixation on short-term movements in markets. Additionally, everyone seems permanently positioned at the edge of their seats, waiting for specific macro data to print. If everyone is focused on the short-term and the macro data, who’s paying attention to the long-term fundamentals of individual companies? This environment should be nearly ideal for such an approach.

Of course, rising rates are a simple explanation for greater long-term discounting. But that doesn’t account for everything. There are companies out there willfully taking on more pain, much to the dismay of the short-sighted. What they’re doing might not be as evident as Marlboro Friday, and it’s hard to identify them because they’re hidden between the over-levered, the perpetually unprofitable, and so on. But there is a big difference between those who choose to take on more pain vs. those who are forced. While the latter may struggle to survive, it’s often the former that builds the tolerance to thrive.

Thanks for reading.

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Maximizing long-term results often requires short-term pain.
(This is true in most aspects of life.)

I have found perspective really important when it comes to embracing the short-term pain, whether it it be about investing or fitness or some other behavioral thing I'm trying to work out/improve in myself. I find that if I can zoom out enough to imagine a future iteration of me thanking my present self for making the choice, the short-term struggle gets just a couple degrees easier. And that's a great starting point!

Also helps a lot to reflect, with gratitude, on past decisions that may have been sacrificial or painful in some regard that we are aware are paying us dividends today. No pun intended; though for those of us who have been investing for a little while, a glance at the portfolio might get those gratitude juices flowing. For me, it's about extracting juice from that past lived experience and cementing it with gratitude for the ways I have benefited from those hard choices I've had to make. Not pushing it out of my head because it was an uncomfortable struggle at the time.
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Altria: Completely Consumer-Driven
As other companies attempt to race away from the fact they’ve been overspending with little to show for it, Altria is on a different path.

“There's a hundred-thousand streets in this city. You don't need to know the route. You give me a time and a place, I give you a five-minute window. Anything happens in that five minutes and I'm yours. No matter what. Anything happens a minute either side of that and you're on your own. Do you understand?” - Ryan Gosling, Drive, 2011

If you were looking for cheap thrills, perhaps you’d hop into your car, line up on a straight patch of road, and slam on the gas. Maybe, if you needed an adrenaline fix and had questionable morals, you’d use your car as the getaway vehicle for a robbery. Of course, for those who are averse to the idea of being confined to a prison cell, a viable alternative would be to simply watch a movie like Drive. If you haven’t seen it by now, maybe reevaluate what you’ve been up to for the past 11 years and then set aside some time to watch it - you can thank me later. Ryan Gosling’s gripping performance is paired with an impeccable soundtrack, and the opening scene is guaranteed to get your blood pumping.

So much of our world tries to capture our attention with similar palpitation-inducing tactics. Especially financial journalism. Everything is delivered with a sense of extreme urgency, leaving little room for us to question what we’re presented with. Last week, when Altria reported its Q3 2022 results, was a prime example, as headlines aimed to kick hearts into overdrive and shrieked of falling revenues, accelerating volume declines, and shares selling off in a desperate manner. You’d be led to believe that the company is being driven off a cliff.
Is that true?

Of course not. But it makes for good theatre.

Let’s break it down.

Altria’s Q3 2022 Headline Numbers

  • Net revenues of $6.55 billion, down 3.5% y/y

  • Revenues net of excise taxes of $5.412 billion, down 2.2% y/y

  • A reported tax rate of 45%, 27.4pp above last year

  • An adjusted tax rate of 24.9%, in-line with last year

  • Reported diluted EPS of $0.12, up over 100% y/y (last year was negative)

  • Adjusted diluted EPS of $1.28, up 4.9% y/y

These numbers aren’t what you’d call pretty. The 3.5% decrease in the top line was partly driven by the fact that Altria sold its Ste. Michelle wine business in October 2021. The company also experienced a decline in net revenues in the smokeable products segment. But digging deeper, a different picture emerges.

For smokeable products, Altria’s largest segment, net revenues were down 1.56% y/y. However, looking at revenues net of excise taxes (which are of the utmost importance) grew by 0.36%. Along with this, OCI (operating company income, a critical metric for understanding continued operations) grew by 1.38% on a reported basis, with OCI margin expanding 59 bps.

These numbers are the result of the mechanics that too few appreciate. Fewer cigarettes are sold each year, equating to lower costs and excise taxes paid. With pricing power, revenues net of excise increase, as does OCI, and margins expand. In Q3 2022, Altria’s manufacturer net price realization was +10.2% but Marlboro’s retail price per pack increased only 6%, which was less than overall inflation.

These underlying dynamics are not new:

Altria’s PM USA cigarette market share was weaker than the previous year:

However, we can see that Marlboro is holding up quite well relative to history:

While market share isn’t too concerning, the severity of the decline in smokeable volumes was somewhat alarming, with total associated product volumes declining by 8.95% y/y in the quarter. This was driven by falling cigarette volumes, partly offset by the strength of Black & Mild cigars.

Looking at the following two sets of numbers helps illustrate how severe the cigarette volume decline was:

I believe this period’s volume decline is likely an outlier, opposite to the positive outlier that 2020 ended up being. While it would be unwise to assume that volume declines would revert to the 4.5% range, it is not unreasonable to think that they would continue to come down alongside macro pressures, especially fuel prices. Any reversion and normalization of smokeable product volume declines will provide Altria with more flexibility moving forward. Additionally, this reminds us that while volumes are resilient in periods of economic weakness, they are certainly not immune. Nonetheless, PM USA’s ability to navigate such a steep volume decline and still increase revenues net of excise taxes and OCI is truly remarkable.

Turning to the oral tobacco products segment, we can see impressive results. Net revenues were...

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Well done on the summary! These are tough businesses to follow and invest in. I don't know much about Altria $MO, but what are your thoughts on the tobacco industry and particularly the ethical side of investing in it?
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Altria's $MO Q3 numbers look pretty reasonable tbh?
People alarmed on - rev? Decline partly driven down y/y from Oct 2021 sale of Ste. Michelle.

Rev(-ET) down 2.2%
OCI up 3.4%
OI up 5.5%

This is on the back of -9% smokeable volumes (-10%, adjusted)

Rev(-ET) +.4%
Reported OCI up 1.4%
OCI margin up 59bps
Marlboro volumes down 8.8%.
Total share a bit weak, but strong in premium subseg.
Cigars (Black&Mild) volumes positive, though primarily driven by trade inventory movements.

Oral tobacco products look strong.
Rev(-ET) +7.7%
Reported OCI up 4.9%
on! volumes up 68% y/y
Total Q3 oral tobacco volumes positive y/y
on! category share grew 2.6pp to 4.8%.

Margin pressure on oral was completely expected. Aggressive on! promotionals will do that - though, IMO, makes complete sense to keep applying same kind of force to win share. Even with decelerating growth, has legs to grow into a meaningful contributor.

A bit surprised to see the ABI impairment charge.

Not surprised on JT JV announcement. With the severing of JUUL N-C, I think we all assumed some kind of announcement would be coming regarding refocusing on alternative RRP?

FY CapEx 175-225m. Unreal how much money this company makes with so little reinvested.

Shares out down 2.3% y/y. FY adj diluted EPS range of 4.81-4.89, 4.5-6% y/y. Hard to argue that isn't strong in wake of macro pressures on ATC habits.
$PM PF IQOS users are up 22.64% in the last year.
Growth this year has accelerated, despite macro headwinds.
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Philip Morris International: IQOS Growth Is No Illusion
Perspective on Q3 2022 results.

“Reality is merely an illusion, albeit a very persistent one.” - Albert Einstein

Dutch-born MC Escher was a masterful graphic artist who spent decades creating mathematically inspired illustrations and prints. His boundary-pushing works explore concepts such as infinity, impossible objects, symmetry, perspective, and geometry. They are peculiar, and if you stare at any of them long enough, like the one above, you will likely feel challenged, conflicted even, as your eyes study what looks to be oddly familiar yet distinctly foreign.

This past Thursday, Philip Morris International released its Q3 2022 results. Along with the reported numbers, growth rates were presented on an organic basis, reflecting currency-neutral adjusted results, excluding acquisitions and disposals. Additionally, adjusted results excluded amortization and impairment of acquired intangibles. Comparative figures were also presented on a pro forma basis, which excludes PMI’s operations in Russia and Ukraine. At first glance, some of the numbers differ so widely that it wouldn’t be unfair to describe the report in its entirety as Escheresque.

What’s to make of it all?

Let’s break it down.

For the quarter, key reported numbers y/y were as follows:

  • Total shipment volumes were up +0.6%

  • HTU (heated tobacco unit) shipment volumes were up +17.1%

  • Net revenue was down -1.1%

  • Operating income was down -14.1%

  • Operating income margin was down -5.5%

  • Diluted EPS was down -13.5% to $1.34

If some of these look ugly to you, that’s because they are.

Now let’s compare them to the pro forma numbers:

  • Total shipment volumes were up +2.3%

  • HTU (heated tobacco unit) shipment volumes were up +21.9%

  • Net revenue was up +6.9%

  • Adjusted operating income was up +4.4%

  • Adjusted operating income margin was down -1%

  • Adjusted Diluted EPS was $1.33, down from $1.44 the previous year. Excluding currency impact, adj. diluted EPS was up 8.3% to $1.53.

The differences between the two sets of figures are staggering. Of course, the...
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Philip Morris International Q3 Results + Thoughts
PMI $PM put up some impressive numbers, though it may not look that way at first glance.

Shipment volume increased on a reported and pro forma basis, .6% and 2.3%, respectively. Declines in combustible volumes more than offset by HTU shipments growing by 17.1%, or 21.9% on a pro forma basis. Net revenues saw +6.7% (CC) and +6.9% pro forma, led by higher HTU volume paired with combustible pricing against combustible declines and device pricing. Worth noting that Marlboro continues to show relative strength.

Q y/y Reported Operating Income was down 14.1%, up 4.4% on a pro forma adjusted basis. OI Margin decreased 5.5pp, or 1.0pp on a pro forma adjusted basis, primarily driven by input inflation, strong device sales growth plus ILUMA strength, supply chain disruptions, and notably due to the war in Ukraine. Reported diluted EPS was down 13.5% to $1.34 and up 8.3% on a pro forma adjusted basis.

The difference between reported and other numbers is extremely wide. Organic growth is adjusted to exclude currency, acquisition, and disposals. Additionally, the pro forma numbers exclude the company's operations in Russia and Ukraine. Undeniably, the loss of Russia is a major hit to the company, as the country has accounted for a HSD % of revenue in the past. This is nothing unknown. However, the continuing operations throughout the rest of the world look to be doing exceptionally well.

  • Smoke-free products were 30.1% of net rev, 29.2% on a pro forma adjusted basis.
  • Market share of HTUs is up 1.3 pts to 7.7% on a pro forma adjusted basis.
  • Pro forma total IQOS users up to 19.5 mil. Continuing the trend shown the chart below:

Granted, PMI is still facing many pressures, but there are some glowing points to consider that I believe paint an easily understood favorable scenario:

  • As a whole, PMI has captured an additional .6% market share YTD in 2022, and aggregate shipment volumes are positive. Sustained growth, even in low and middle-income markets, and volume guidance are particularly encouraging.
  • Pricing continues to more than offset combustible volume declines.
  • Moving forward, smoke-free products (IQOS, 30%+ of net revs) can continue to grow at a healthy double-digit clip.
  • Accelerating growth, paired with a new device launch (ILUMA), further compresses margins on top of inflation and supply chain pressures, as devices have an unfavorable margin profile. However, this will accelerate related HTU volume growth over time, leading the segment to demonstrate significant operational leverage, and margins should incrementally expand over the long term.

Along with this, there are two notable developments:

  1. PMI has reached an agreement with Altria to end the companies' commercial relationship regarding IQOS in the U.S. as of April 30, 2024. For this, PMI will be paying a total cash consideration of $2.7 billion - $1 billion upfront and the remaining by July 2023 at the latest.
  2. PMI has increased its offer price for shares of Swedish match to SEK 116 from the initial SEK 106, representing a 52.5% premium over the closing price prior to the announcement of the initial deal. The revised price accounts for the value relating to SWMA's cash flows generated in USD and the recent strength of the USD. PMI has stated that given global economic uncertainty and recent weakness in markets that the offer price should be found attractive by SWMA shareholders. PMI has further stated that this is a best and final price, which in accordance with the Takeover Rules for Nasdaq Stockholm, means that the price can not be increased any further.

I remain very skeptical that PMI's SWMA offer will reach the required 90% acceptance threshold. Nonetheless, U.S. IQOS, without a legacy combustible business, represents purely incremental growth with no cannibalization. Even in a taxation environment that does not differentiate between combustible and HTP products, this could be a massive opportunity for PMI. The company has stated that even if the SWMA deal does not finalize, plans are in place to get IQOS into the United States.

Not much to say about Healthcare and Wellness. Net revs ~$275 million and adj. op loss of ~$100 million. My stance on the segment has remained unchanged since earlier in the year:

"But maybe this segment becomes a perpetual black-box money pit, or perhaps it will turn into an incredibly profitable new segment. Either way, I’ll wait to speculate further."


  • Cash cow
  • Currency headwinds ouch
  • Stable core business
  • IQOS continues to show very strong growth

I'll likely write a more in-depth analysis to update my prior and layout thoughts on future scenarios.

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From a competitive standpoint, why is it that Altria is willing to sell out of their interest in IQOS? I get the feeling that Philip Morris is more aggressive in moving towards a smokeless future. Is that a fair characterization?
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