Equity Highlights: September 2023

Welcome to Broyhill's Equity Highlights, where we share a few quick takes on recent news across the portfolio. every month.  

We aim to make these highlights easy to read and easy to repeat. Feel free to share our work! 

PMI Investor Day 2023. Philip Morris recently laid out a series of ambitious goals to become two-thirds smoke free by 2030 in its annual Investor Day. It has been a long time coming for traditional tobacco manufacturers to transition their product suite to reduced-risk products. What makes the pleasure of taking a cigarette drag so fast (combustion) is also what makes smoking cigarettes so dangerous. The earliest vape patent was approved in 1930, over a decade before epidemiologists recognized smoking as the leading cause of lung cancer. Since then, the race to develop safe and profitable alternatives has only intensified with PM the defending lead. Philip Morris remains one of our largest and highest conviction holdings.

Why Dollar General Might Just Be the Worst Retail Job in America. Rumor has it Dollar General's ~19,000 store count may be too much to handle. Unsafe store conditions and theft have forced the company to a $150M labor investment, a sum the Street is skeptical of. In a back of the envelop calculation, the investment equates to about $14 a day per store - surely this won't be enough to remove DG's new label of Worst Retail Job in America right? We spoke with management to get a better sense of how the $150M investment will be allocated. We learned that the investment will support district managers in selecting a "Smart Team" of 2-4 of the district's best inventory stockers and sending them to clean up the worst stores in the district. Management began piloting the team approach in June then deployed the strategy across its store base. We are expecting the investment to reduce inventory shrink and improve same-store sales, metrics which have plagued the stock this year.

AMLO Shows He's Not Going Quietly With New Market Interventions. Mexican President Andrés Manuel López Obrador or AMLO tasked transport officials to deliver a unilateral fee change to be levied against Mexican airports. The stocks tumbled after the news though the impact to each of their earnings power is still unclear. We trimmed our airport positions months ago when AMLO announced he would seize a key portion of Grupo Mexico's railroads. 

Microsoft eyes closing its giant Activision Blizzard deal next week. The wait is over! Microsoft and Activision are now through their last regulatory hoop. After restructuring the deal to transfer cloud gaming rights to Ubisoft, the Competition and Markets Authority (CMA) of the UK agreed to approve the merger. While others backed down, the Federal Trade Commission (FTC) still wants to play a losing game. Despite its recent loss, the FTC plans to resume its case against the merger in its administrative court. We are not concerned.

Universal Music Aims to Boost Artist Royalties in New Streaming Model. Did you know the person (or, more likely, an AI bot) who makes white noise gets paid the same amount per listen as Beyoncé? It doesn't seem right, but it's true. As it stands, streaming platforms pay the holders of music rights (like UMG) based on their artists' listening share. When white noise accounts for 3 million daily listening hours, the listening share UMG takes home to Beyoncé is less. Implementing the change would more fairly compensate artists and discourage the creation of low-value tracks - a win for consumers, artists, and UMG.