Yesterday Altria announced the its Phillip Morris subsidiary signed a deal that will allow the manufacture and sale of Marlboro cigarettes in China, allowing the Chinese to get lung cancer from a more flavorful Western brand of cigarette instead of getting cancer from stale, communist cigarettes.
The deal is undoubtedly very good for Altria, it opens up more than a billion potential smokers to their brands and also lets Altria market Chinese brands outside of China in a joint venture with the Chinese government.
The case for Altria in the US is based on the fact that since cigarette advertising is limited brands like Marlboro and Winston have a lot of value since they are established brands that have value for smokers, and building new brands is almost impossible.
While price increases in developed markets have off set declining smoking rates, revenue from cigarettes in the US has basically been stagnant.
Access to developing markets is key to Altria. Until this week Altria didn't have access to the billion plus people in China, and still doesn't have access to the billion plus consumers in India. Getting Altria's popular brands in front of these consumers will create a lot of new revenue for Altria. Despite the fact that Altria has had very limited business in these nations, Marlboro is still a well known and respected brand, leading to the widespread sale of counterfeit Marlboros.
While Altria trades at a nice low P/E, has a great dividend yield and has made a lot of money for shareholders, I have to wonder about the long term health of a business that depends on its customers making a fantastically stupid decision on a daily basis. With smoking on the decline in developed nations, Altria now turns to the less developed world to find people who still think smoking is cool, making sure that in a few years biotech will have a good market in these nations, where lung cancer will be hot.
Timothy Burger
timothyb(at)timothyburger.com
