It's no secret how tumultuous tobacco stocks can be. With legislation always coming through or pending that seeks to limit the industry's ability to grow, big companies like Altria Group (MO) are always looking for new ways to cash in. The truth is, that in such a tumultuous market, only the strong will survive. Unfortunately for Altria, it seems like it may be in the downside of the battle.
Competitors Phillip Morris International (PM) and Lorillard (LO) are not only bigger, but they have been more profitable so far in 2012, a trend continuing on from last year. Altria, meanwhile, has seen a drop in its sales volume. This drop has slid the company behind its two larger competitors and into a category with other competitor Reynolds American (RAI) as a less attractive big tobacco stock option.
It's not a good position to be in. The tobacco company continues to profit but its longevity is in question now more than ever. Just last month, the Center for Disease Control and Prevention unveiled a $54 million plan to attack the tobacco industry. The campaign is another in the long list of shock-and-awe marketing done to try to prevent smoking and tobacco use. This time around, however, will feature the first ever television advertisements put on by the CDC.
The clasping down by the CDC, and other American regulatory institutes, has led some investors to go with Phillip Morris International. Other governments have certainly been more lenient in the past with regulations, and while a few are beginning to tighten up, the international tobacco trade is still booming.
In America, the big tobacco companies continue to fight. Altria, for instance, spent about $11million on lobbying last year, mostly aimed to root out its fight against the maker of a roll-your-own cigarette machine. At this point, the lobbying price tag is almost as normal as any business expense as government initiatives have the capability to shape business as much as anything else. That just comes with the industry.
However, unlike these other companies, Altria has diversified a bit beyond tobacco. It still makes its large share of profit in the tobacco industry, including its ownership of UST, a manufacturer of moist, smokeless tobacco. But it also the largest shareholder of SABMiller, one of the world's largest beer and bottling companies. Rounding out the alcohol side of business, the company also owns Ste. Michelle Wine Estates, an award-winning vineyard in Washington.
And it's these diversification products that I see Altria ultimately relying on to find a boon in profits. Cigarettes will continue to bring in cash, there's no question about that. Even with Altria sliding off from its one-time domination of the tobacco market, it'll still take part in the industry' s success. It's just going to be less than it would like.
So we enter these other ventures. SABMiller has proved to be a solid investment. The company bottles internationally for Coca-Cola (KO), Miller Genuine Draft and several lines of Italy's Peroni beer. Last year, the brewing giant took over Foster's brands in Australia, adding a new network of beer drinkers to market toward. Foster's was recently upgraded by Standards & Poor's, with a new rating reflecting SAB's ability to handle the brewery's output properly, and strong economic incentive to do so.
SAB has had a major competitor in the world's largest bottling outfit - Anheuser-Busch InBev (BUD) - but even that rivalry could soon come to a close. Rumors have been swirling recently for a MegaBrew company, which involves AB InBev's takeover of SAB. The move would be made possible if Burger King's public offering provides enough cash for InBev investors involved with both companies.
Of course, Altria stands to make quite a bit of cash if this deal should happen, but it'll stand to lose out on some profits in the long run from its bottling company. As I mentioned, with cigarette profits declining, Altria needs to ensure it can keep cash flow coming in permanently, in areas outside of tobacco.
Even its stake in UST, formerly the U.S. Tobacco Company, is at risk. Despite the rise in sales for smokeless tobacco, mostly in the U.S. and Scandanavia, the industry faces the same risks as cigarettes do. Experts have predicted a continuation in the nearly 7% annual rise in smokeless tobacco sales at least through 2012. So that's a good sign. But it, once again, begs the question of how long it can continue.
The tobacco industry has made so many people rich that it's hard to not buy. Even 2012 has presented enough opportunity for investors to cash in on international cigarette sales and smokeless tobacco profits. But the U.S. government is cracking down harder than ever on cigarette sales, marketing and corporate taxation. And it's only a matter of time before foreign countries begin to do the same. China, a long-held beacon of smokers' rights, announced a smoking ban last year in restaurants, and the regulation will only become tighter.
I'm nervous to suggest anything negative about the tobacco industry's earnings. For so many years now, it has fought off government initiatives to shut down its product lines or force the giants to spend millions in lobbying fees. What will be the tipping point? Well, I don't know. Realistically, tobacco companies have the possibility to turn large profits well through 2012. Foreign markets are still booming and companies like Altria have enough cash and experience to handle what may come.
But how long will it last? I don't think too much longer. And Altria's slow sales have started to prove that this may be the spiraling down of the whole venture. The company has been wise, so far, to diversify smartly with SAB, UST and others. But it'll need to show more initiative in profiting from outside the tobacco industry to stay afloat for the longer term. And with the MegaBrew possibility lurking, it'll have the cash to buy something terrific. That move may be the one that determines the kind of year it's going to be for Altria investors and speculative buyers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.