Terry Smith is a British fund manager, who has an impressive track record over the past decade at the fund he founded, Fundsmith. Some call him the British Warren Buffett.
I recently identified an interesting video of him discussing the tobacco industry. I wanted to share it with you, and include a transcript of his comments too:
Check the video here. https://twitter.com/DividendGrowth/status/1325799553065349121
You can read the full transcript from here:
"I mean they obviously own the number one brand in the world - Marlboro. One of our theories. I think it's a fact actually on the tobacco industry is that the tobacco industry is an illustration of the of the reverse of that great Reaganism. He said the nine most dangerous words in the English language are "I'm from the government and I'm here to help".
The tobacco industry is an illustration that the best business you can be in is one that the government attempts to stop, because if you do a chart of the tobacco industry over many decades you'll find it wasn't a particularly strong performer until the government tried to stop it. And then the government got involved by pack warnings and then the surgeon general's pack warnings. Then litigation by the states, then litigation that was on a federal level ,then bans on advertising and marketing and now bans on packaging and so on. This has led to two things which have been hugely beneficial to their financial status (their operations, their returns, their profits, their cash flows and to us as shareholders.
And those are one: These are industries which have got fabulous returns on capital. In the end they're basically selling an addictive product. They will never face a new competitor.
If you go into your boardroom and say I got a really good idea to the economics of tobacco. I think we should get in the industry it will be a very short conversation. Nobody's ever going to enter the industry.
And normally the way in which super returns are competed away is by people entering the business. It can't happen.
So they've got this wonderful business with these fabulous returns and there's no one brand and they can't spend any money on advertising marketing or now packaging. What's not to like?
And then the final frontier. I mean, of course if you think you've got this brilliant brand down there and you're going to compete with Marlboro How do you do it? You can't advertise. No.
And also with plain packaging, apart from the fact that all the statistics show it hasn't caused an iota of downturn in actual smoking; If you go into a shop, and there's no display of anything other green packs with horrible photographs on them, and you want something to smoke, you say something like: Do you have any Marlboro? Because you can't see what it is. It's all right. So I mean the Government's intervention is, I mean ,we are very very inclined to invest in things that the government thinks is a bad idea and they'll try and stop. "
It is interesting that he has had a position in Philip Morris International (PM) for the past decade. It is one of the largest positions in his mutual fund.
Tobacco companies in general are undervalued today, with the likes of Altria (MO), British American Tobacco (BTI) and Philip Morris International (PM) selling at very cheap valuations. You may also like this video of Warren Buffett and Charlie Munger discussing tobacco companies, which I discussed before.
Another interesting fact is that Michael Burry, who is famous for his bets against housing right before the 2007 - 2009 Financial Crisis, just initiated a position in Altria Group (MO). It is fascinating to watch a lot of value investors seeing the opportunity in tobacco companies today.