Traditionally in an economic downturn, we drink and smoke and gamble with the same abandon as ever, so tobacco companies, brewers and casino owners should be sitting pretty in times like ours. But this time around sin is turning out to be a mixed bag.
Earnings last week from Philip Morris International certainly provide strong support for that truism. When Altria, maker of Marlboro, spun off the international business in March, PMI, got CEO Louis Camilleri and the company’s entire business outside the US. It’s easy to see what appealed to Camilleri. The company’s earnings rose almost 23% this quarter, and management says the outlook for the rest of the year is 19 to 21% growth. And people weren’t just buying cigarettes; they were paying more from them. Yes that’s right, pricing power. As affluence spreads across the globe, cigarettes are an easy status symbol and Marlboro has been the beneficiary of trading up from local smokes. Among the countries with notable “favorable pricing”: Indonesia, Mexico and Russia. But even in longer trod markets, like Germany and Italy, the company found hiking prices didn’t do too much damage.
In a July 24 report, Morgan Stanley analyst William Pecoriello found that even the weary US consumer is managing to make it to the supermarket to stock up on some Bud Lite, or, more often, a craft beer. Pecoriello’s research showed that year-over-year US alcohol volume sales were up 2.3%, and dollar sales even higher, up 4.7%, in the four weeks ending July 13.
This week we roll into more news on the darker side of the economy.
Parent of Camel-maker RJ Reynold announces earnings on Wednesday the 30th, followed the next day by Altria, the US marketer of Marlboros. But as noted, not all vice is doing well. US cigarette companies are battling seemingly ever-rising state excise taxes – and the threat of a federal hike when the next president makes it into office. Potential FDA regulation, likely to come to a vote in the House of Representatives could make it tougher for smaller players to make inroads against Marlboro’s dominant market share and marketing savvy. And all those smoking bans aren’t helping either. (You could argue these pressures will descend on the international companies soon enough – bans are already taking hold..)
But it’s not always right to blame the cards they are dealt. Sometimes it’s poor management that is to blame. Charles Norton, manager of the Vice Fund, a $149 million 5 star mutual fund, that only holds stock in gambling, defense, tobacco and alcohol companies notes that gaming has been a terrible performer this year, comparable to the bursting of the tech stock bubble in 2000. That’s helped drag his fund, which has averaged more than 13% return for the past five years, down more than 20% so far this year. High gas prices and plentiful competition has hurt local gambling parlors. Las Vegas’ reinvention as entertainment for the whole family has also left it vulnerable to the tightening of the American purse string. (And high debt levels at many casinos is hurting too.)
But at the very high end – casinos that cater to the international high stakes jet set that favors Macau over Foxwoods– should be more immune. That they haven't been is the result of poor management and a slide into a discounting war. One exception, Norton says: Steve Wynn. Wynn, he says, has kept above that fray by created a property so fantastic that gamblers in the Chinese port demand to go there. Pricing power once again.
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