“It was luxuries like air conditioning that brought down the Roman Empire. With air conditioning their windows were shut, they couldn’t hear the barbarians coming.” - Garrison Keillor

It was the summer of 1902. William Carrier, while working at a publishing company in Brooklyn, New York, became irritated as the poor air quality and high humidity continued to result in bad prints. Channeling his frustrations, he created schematics for a new device: the modern air conditioner. In 1915, with a patent and extensive scientific knowledge, William partnered up with a team of engineers to found the Carrier Engineering Corporation.

But the air conditioner, which many take for granted and view merely as a convenience, is actually one of the most critically important modern marvels. Along with heating and ventilation systems, AC has allowed humans to flourish in parts of the world that would otherwise remain inhospitable. Additionally, these inventions (paired with reliable energy sources) are largely to thank for the precipitous fall in extreme weather-related deaths over the last century.

Carrier, along with spreading this critical technology worldwide, has expanded its reach and currently operates in 3 segments:

Carrier became a subsidiary of United Technologies in 1980 and, like Otis Worldwide, was spun off as a separate publicly traded company in 2020. Its headquarters are located in Palm Beach Gardens, Florida, United States, and its shares trade on the NYSE under the ticker CARR. The company currently holds the following credit ratings and outlooks:

Disclaimer

Carrier operates in critical markets that are growing from multiple secular tailwinds. Through industry-leading products, digitization, strict cost management, and a shift to higher-margin recurring revenues, the company is positioned to create substantial long-term value. At current levels, the company can produce this value while returning significant capital to shareholders via dividends and buybacks on the back of an undemanding growth scenario.

“But what we call our despair is often only the painful eagerness of unfed hope.” -George Eliot, Middlemarch

In the early spring of 1746, the legendary Francisco de Goya was born. Widely considered to be the greatest Spanish artist of the era, the outstanding quality of his body of work is only matched by its impressive size, comprised of over 700 paintings, 280 prints, and thousands of drawings. His earlier compositions, primarily portraits and genre scenes, expertly wrap subjects in vibrant hues and ethereal clouds. Spanning decades, Goya crafted masterpieces for churches, banks, royalty, and private collections. His contributions would ultimately change the trajectory of the art world, and his influence will extend far beyond our reflection today. But the revolutionary thoughts born in the 18th century didn’t just give way to revolutionary art. They, as they often do, led to actual, violent revolutions.

The company pushed hard into energy markets after the fall of Enron. It charged into credit default swaps during the 2008 financial crisis. And now, ICE is stepping on the accelerator in the mortgage ecosystem as rates continue to rise and real estate prices waver.

In 2000, Jeffrey Sprecher had a vision.

The global energy markets were opaque, clunky, and inefficient.

He was going to build a solution.

Founding Intercontinental Exchange (ICE), Sprecher’s vision was not only supported by his strong engineering background but also by the backing of Goldman Sachs, Morgan Stanley, BP, Total, Shell, Deutsche Bank, and Société Générale. Over the last 22 years, ICE has boldly engaged in a large number of acquisitions and has become entrenched in the critical plumbing of global markets.

Disclaimer

Intercontinental Exchange’s talented team continues to leverage strategic acquisitions to facilitate growth and become further entrenched in global markets. The stock has recently sold off in tandem with broad market weakness and its announcement of its definitive agreement to acquire $BKI. While current conditions may raise questions regarding the terms of the deal, current levels present a skewed risk/reward, and the company’s business model will create substantial value long-term while returning capital to shareholders.

Bigger isn't always better, yet investors won’t stop obsessing over things like Total Addressable Market. The faulty reasoning begins with the premise that large profits must come from large markets. This is assuredly false.

Not all parts of a market are serviceable, and even if they are serviceable, there is no guarantee that such activities can be done profitably. It must be understood that large markets invite a large amount of competition and, generally speaking, if you want to make a lot of money, competition is bad. Time and time again, we’ve seen competitive pressures erode excess profits until most participants become mediocre.

Instead of wanting to be a big fish in a big lake, why not aim to be the biggest fish in a small pond? Or what if you could be the only fish?

Founded in 1942, the company researches, produces, manufacturers, and markets a mix of products, including:

United-Guardian (UG) has formed marketing and supply agreements with partners around the world, presenting unique opportunities for growth. This is further amplified by the company’s R&D efforts, which aim to not only formulate new products but identify new uses for their existing portfolio. Continued operations are extremely profitable while being very capital-light, allowing the company to generate substantial free cash flow it eagerly returns to shareholders.

The company’s corporate headquarters are in Hauppauge, New York, United States. Shares trade on the NASDAQ under the ticker UG. Presently, the company has a market cap of ~$57.3 million, has no debt, and as a microcap, seemingly has no current analyst coverage.

Disclaimer

United-Guardian is a durable business run by extremely conservative management. The company has a fortress balance sheet and has reported positive net income every year since 1991. Furthermore, the company’s microcap status offers several contrasting dynamics:

Management’s interests are heavily aligned with shareholders, with the CEO owning over 25% of outstanding shares, and while total growth prospects remain uncertain, continued operations are very capital-light, allowing nearly all generated cash to be returned to shareholders.

As an illiquid microcap, a mix of unique catalysts could present an exceptional opportunity to buy into this highly cash-generative business.

"I've often seen these people, these squares at the table, short stack and long odds against them. All their outs gone. One last card in the deck that can help them. I used to wonder how they could let themselves get into such bad shape, and how the hell they thought they could turn it around." - Mike McDermot, ‘Rounders’

I’ve loved poker ever since being swept up in the 2003-2006 boom when Texas hold‘em became all the rage. In the midst of it, my life-long best friend (who I’ve known since the age of four) and I built a professional-grade poker table from scratch. Fine felt, a leather handrail, the whole nine yards. It fit perfectly in his dimly-lit basement.

We started hosting a simple cash game—or at least it started that way.

It began with us playing on Friday nights but quickly became our whole weekend. Younger and with seemingly infinite energy, it somehow slipped into the rest of the week too.

All through each night, the ashtrays worked hard to keep up, and aside from quick runs to the fridge for drinks, there was never an empty seat. Pots and sides would occasionally grow massive, which was odd because none of us had any money back then. Of course, there’d end up being ‘bad beats’ and all kinds of trash talk, but honestly, up or down, it didn’t matter. That basement was our sanctuary.

We didn’t have many responsibilities or obligations back then, but we were all still in school. Inevitably, we began to either skip class or sleep right through it. I have no idea what lessons I missed. Does it matter? I undoubtedly learned more about myself and about life than I ever could have in a classroom. No textbook can ever replace sitting around a poker table, late at night, with close friends, making memories.

That kind of stuff is the real prize in life.

The bases are loaded, there are no outs, and BAT is ready to swing for the fences.

In 1902, British American Tobacco was formed as a joint venture between UK-based Imperial Tobacco Company and U.S.-based American Tobacco Company. Not too clever with the names back then, were they? Experiencing massive changes in both ownership structure and operations, including a reorganization in 1976 to form a new holding company, and more recently, its 2017 acquisition of Reynolds American, the company has turned into a multinational dynamo.

Presently, British American Tobacco (BAT) owns an impressive portfolio of tobacco and nicotine products, including:

Legacy Categories

New Categories

Championing its “A Better Tomorrow” strategy, BAT has seen rapid, accelerating growth in its New Category segments. Complimenting these New Categories, the company is moving Beyond Nicotine by actively investing in health and wellness R&D, bolt-on M&A, and strategic collaborations. These initiatives fit into the company’s overall “Faster Transformation” objective, in which, along with growing new consumer product brands, BAT is simplifying its organizational structure through rationalizing combustible SKUs and reducing related business units. These programs, paired with its ability to generate substantial operating cash flow, have allowed the company to meaningfully deleverage since 2017 while remaining committed to returning significant capital to shareholders.

The company’s corporate headquarters are in London, England. Shares trade on the LSE under the ticker BATS and on the NYSE under the ticker BTI. Shares are also available on the JSE and the KN. Presently, the company holds the following credit ratings and outlooks:

Since fully acquiring Reynolds American, British American Tobacco has steadily deleveraged while paying an increasing dividend while also engaging in significant R&D and M&A, and now, the company’s transformation is reaching a powerful inflection point.

Despite macro headwinds, BAT is seeing sustained and significant growth across New Categories, which are now contributing significantly to sales. Continued scaling will enhance operational leverage that will generate substantial long-term value. BAT is trading at a depressed multiple, and management has signaled its intentions to prioritize share repurchases to further drive shareholder returns.

The global tobacco industry is quickly transforming into a space offering a wide variety of nicotine products. Aiming to substantiate reduced risk claims, major manufacturers have sunk billions into R&D to stay ahead of the curve. This has led major manufacturers to pull further ahead - though they have already held a lead due to historically significant regulation.

The consolidation of market share is rather clear, as per recent global data:

China National Tobacco Company (CNTC) sells almost half of all cigarettes and dominates the Chinese market.

The Cigars and Cigarillos market is less concentrated, and the majority of incremental demand is driven by China.

Smoking tobacco is dominated by a few major brands, and most demand is serviced from Europe.

Smokeless tobacco has several large players, but oddly, nearly a quarter of the market is hyper-fragmented amongst tiny manufacturers.

Vaping has seen a massive deceleration in growth due to unsubstantiated health scares and resulting regulation, including device and flavor bans. The category has several large players, though JUUL’s share has fallen significantly since this data became available, and British American Tobacco’s share has grown. Overall, the vaping (ENDS) space has remained quite fragmented globally, though regulation may force small players out (this is especially true in places such as the United States).

HTPs are fast-growing, and due to the complexity of product development, there are only a few players in the market, with PMI being the most dominant by far. BAT has grown its share notably in the last two years.

Modern oral nicotine is fast growing, with only a few companies dominating most of the market, with SWMA clearly leading. However, in recent years, BAT has taken considerable share and has begun to dominate the Scandinavian market.

The future of the nicotine industry can be condensed into several key points:

With a dominant market position insulated by regulation and net-favorable taxation dynamics, Altria $MO, in clockwork fashion, has wielded pricing power to more than offset cigarette volume declines. While the world frets about the USD wrecking ball and possible deglobalization, this old-economy stalwart just keeps humming along:

My next comprehensive company-specific piece, covering British American Tobacco $BTI, will be out this Sunday, 9/4/2022.

As volumes for cigarettes continue to decline, new categories have been fast-growing and even accelerating. The market seems to be largely discounting the fact that these products are just now inflecting to profitability as they continue to take market share and poach from legacy products:

While these volumes are still completely dwarfed by cigarettes, non-combustible products (the above three) plus traditional oral now comprise 14.6% of $BTI total revenue, with no signs of slowing. Long-term, I believe this will lead to:

Driven by IQOS, $PM's flagship heated tobacco product.

IQOS HTUs (heated tobacco units) generate more than x2 the revenue of cigarettes on a per unit basis, as they are taxed at significantly lower rates.

PMI cigarette volumes remain relatively stable relative to trend and pricing has more than offset declines. Overall dynamics indicate IQOS growth is poaching consumers from other parts of the tobacco market, and not that PMI is strictly cannibalizing its own base.

Faster volume growth x higher margins x longer living customers