1. Profitable
addictions
–
Sin
stocks
Coined
‘sin
stocks’,
the
alcohol,
tobacco
and
gambling
industry
have
been
able
to
generate
billions
of
dollars
in
revenues.
The
addictive
nature
of
the
goods
and
services
has
allowed
investors
to
reap
from
the
growing
profits.
The
following
is
an
analysis
of
the
current
status
of
each
industry,
and
another
analysis
of
the
market
dominator
from
each
industry,
in
Canada.
Alcohol
industry
In
2013,
this
industry
recorded
total
revenues
of
$25.6
billion
and
grew
at
a
compound
annual
growth
rate
(CAGR)
of
1.7%
between
the
years
2009
-­‐
2013.
Analysts
have
estimated
that
the
proceeding
years
will
see
increased
consumption
volumes
and
thus
profits.
The
CAGR
between
the
years
2013
and
2018
for
consumption
volume
is
0.9%
(from
0.2%
in
2009-­‐2013).
The
industry
has
seen
a
fluctuation
of
returns
in
the
past
5
years,
and
is
predicted
to
stabilize
in
the
next
2
years;
forecasted
CAGR
is
2.1%
from
2013-­‐2018,
and
comparatively,
1.9%
and
4.4%
in
the
US
and
Mexican
markets
respectivelyi.
Profit
wise,
an
increase
is
expected
from
4.5%
in
2015
to
4.8%
in
2020,
of
industry
revenue.
All
forecasted
growth
is
being
attributed
to
the
following
possibilitiesii:
1)
The
potential
success
of
the
recent
re-­‐evaluation
of
provincial
policies
(such
as
in
British
Columbia)
that
restrict
the
sale
of
alcohol
in
grocery
stores
-­‐
consequently,
the
additional
distribution
stream
would
increase
revenues.
2)
Better
relations
between
government-­‐run
alcohol
retailers
and
breweries,
distilleries
and
wineries
-­‐
potentially
leading
to
a
reduction
in
costs
and
increased
profits.
3)
Increased
population
in
the
legal
drinking
age
group
(20-­‐64)
-­‐
leading
to
increased
revenues.
4)
Potential
increased
disposable
income
per
capita
due
to
prospering
economy;
allowing
for
increased
sales.
Despite
the
positive
aura
these
factors
have
set,
there
are
others
that
contradict
this;
the
following
highlight
some
of
these:
•
Predicted
decrease
in
per
capita
alcohol
consumption
as
consumers
are
more
aware
of
health-­‐related
risks
with
drinking
–
especially
the
increased
excess
calories
gained
from
drinking.
•
Forecasted
decline
in
world
supply
of
wheat
due
to
bad
weather
conditions
and
countries
in
Europe
reducing
supply
levels,
leading
to
higher
world
prices.
•
Anticipated
increase
in
world
aluminum
prices
possibly
due
to
the
progress
of
emerging
markets
(aluminum
is
used
heavily
in
construction
and
packaging
consumer
goods)
and
rising
energy
costs
which
affect
costs
of
melting
the
aluminum.
The
metal
is
commonly
used
to
package
beer,
thus
increasing
costs
of
production.
New
entrants
The
constant
progression
of
the
industry
peaks
the
interest
of
newcomers
despite
the
predicted
rising
costs.
However,
new
entrants
are
not
able
to
meet
the
capital

2. outlay
necessary
for
large-­‐scale
production
plants
and
competition
with
well-­‐
established
brands.
Because,
in
this
industry,
success
is
only
granted
to
those
with
high
volumes
of
sales,
it
is
difficult
for
new
entrants
to
achieve
this
given
the
strong
competition.
The
oligopoly
market
thus
prevents
many
new
entrants
into
the
industry,
which
further
enhances
investor
confidence
in
the
existing
businesses;
one
of
which
is
discussed
belowiii.
Market
dominator:
Anheuser-­‐Busch
InBev
(AB
InBev)
The
world’s
largest
brewer
with
a
25%
global
market
share
led
the
Canadian
market
with
33.6%iv
of
the
market
value
as
of
December
2014.
Currently
dominating
an
equivalent
market
share
of
the
industry,
the
firm
developed
a
new
strategy
called
‘Focus
Brands’,
in
order
to
further
improve
its
position
in
the
market.
Focus
Brands
simply
prioritizes
certain
brands
from
a
portfolio
of
over
200
choices,
depending
on
customer
preferences
of
each
geographical
market.
Attention
to
this
strategy
was
the
result
of
AB
InBev’s
Q1
performance,
which
is
highlighted
below:
•
Growth
in
revenue
by
6.2%
•
Reduction
in
total
volumes
by
1.2%
•
Increased
cost
of
sales
by
4.8%
•
Profits
compared
to
Q1
2014
increased
by
62%
•
Earnings
per
share
increase
from
0.87
USD
in
Q1
2014
to
1.40
USDv.
Advertising
relevant
brands
in
accordance
with
geographical
markets
led
to
the
increased
revenues
and
profits,
as
per
the
Q1
report.
However,
the
same
strategy
was
criticized
to
have
caused
the
higher
cost
per
unit,
as
the
volumes
of
sales
were
higher
than
predicted.
Proven
to
work,
business
operations
have
been
adjusted
to
evolving
around
the
Focus
Brands
strategy
and
strengthening
consumer
confidence
for
AB
InBev.
Figure
1
shows
the
continuous
progression
of
AB
InBev’s
stock
price
in
the
last
5
years.
Aside
from
its
managerial
forte,
analysts
believe
that
the
captured
global
market
share
of
AB
InBev
allows
for
a
strong
financial
foundation
that
will
support
future
growth
opportunities
thus
the
existence
of
potential
improvements.
It
has
been
predicted
that
the
AB
InBev
stock
(BUD)
is
going
to
maintain
its
upward
trend
for
the
near
future,
as
investor
confidence
is
maintainedvi,
making
it
a
worthwhile
investment.

3.
Tobacco
industry
In
2013,
the
Canadian
tobacco
market
had
total
revenues
of
$15.7
billion
dollars,
as
compared
to
$25.6
billion
generated
in
the
alcohol
industry.
However,
the
industry’s
CAGR
was
9.2%
between
2009-­‐2013,
significantly
higher
than
1.7%
in
the
alcohol
industry.
Analysts
predict
the
performance
of
the
industry
to
decelerate
as
the
CAGR
drops
to
2.9%
between
the
years
2013
and
2018;
while
it
will
drop
to
2%
and
-­‐5.6%
in
the
US
and
Mexican
markets
respectively.
Figure
2
shows
the
anticipated
deceleration
in
growth
-­‐
credit
for
this
decline
has
been
given
to
the
vigorous
attempts
made
by
the
government
to
create
a
tobacco-­‐free
environment.
Current
measures
in
place
arevii:
•
Prohibition
of
most
forms
of
tobacco
advertising,
promotion
and
sponsorship
•
Tobacco
products
are
required
to
have
graphic
health
warnings
and
information
like
toxic
emissions
or
constituents
•
Smoking
restrictions
in
work
and
public
places
•
Ontario
government
ban
on:
o
Smoking
on
patios
at
bars
and
restaurants
o
The
sale
of
tobacco
on
university
campuses
E-­‐cigarettes
Many
have
opted
to
use
substitutes
such
as
nicotine
patches,
herbal
cigarettes
and
electronic-­‐cigarettes
after
becoming
more
aware
about
the
harmful
health
effects
caused
by
smoking.
E-­‐cigarettes
let
out
vapor
instead
of
smoke,
some
contain
nicotine
while
others
don’t;
those
that
don’t
are
used
to
counter
the
oral
fixations
caused
by
smoking
cigarettes.
These
products
became
a
growing
trend
in
2013
and
ever
since
then,
large
cigarette
manufacturers
such
as
British
American
Tobacco
Plc.
and
Japan
Tobacco
International
Inc.
decided
to
set
up
subsidiaries
that
would
manufacture
them
and
even
make
acquisitions
of
companies
that
already
manufactured
them.

4. Analysts
see
that
the
popularity
of
e-­‐cigarettes
may
possibly
reduce
the
rate
of
deceleration
being
faced
by
the
tobacco
industry.
However,
this
may
not
be
the
case
as
provincial
governments
have
already
begun
regulating
the
e-­‐cigarette
market;
for
example,
Nova
Scotia,
British
Columbia
and
Ontario
are
working
towards
prohibiting
all
advertisements
and
promotions
of
e-­‐cigarettesviii.
Overall,
the
total
effect
of
its
popularity
is
yet
to
be
seen
in
the
upcoming
years.
Counterfeit
trades
Illicit
trades
conducted
by
smugglers
affect
companies
in
the
industry
-­‐
approximately
10%ix
of
annual
globally
consumed
tobacco
is
smuggled.
The
counterfeit
trade
acts
as
an
unpredictable
rival
for
the
companies,
and
thus
is
difficult
to
counteract.
Regulatory
actions
have
reduced
the
estimated
figure
over
the
years
but
the
counterfeit
trades
are
far
from
being
eradicated.
Consequently,
the
industry
as
a
whole
realizes
fewer
revenues
and
profits.
Nonetheless,
there
are
companies
profiting
extensively
from
trades
made
legally,
one
of
which
is
British
American
Tobacco
Plc
and
is
discussed
below.
Market
dominator:
British
American
Tobacco
Plc
(BAT)
In
Canada,
BAT
held
up
to
40.4%
of
the
tobacco
industry
market
value,
while
the
closest
competition,
Phillips
Morris
International
Inc.
held
26.1%,
as
at
2013x.
With
strength
in
the
diversity
of
brands
it
owns,
the
company
focuses
on
four
that
constitute
as
their
‘Global
Drive
Brands’,
namely
Dunhill,
Kent,
Lucky
Strike
and
Pall
Mall.
Taken
from
the
BAT
Q1
2015
report,
the
following
are
the
highlights:
•
At
constant
rates
of
exchange,
revenues
increased
by
1.7%
•
At
current
rates
of
exchange,
revenues
declined
by
5.8%
•
Global
Drive
Brands’
cigarette
volume
grew
by
5.7%
•
Cigarette
volume
from
subsidiaries
decreased
by
3.6%
BAT
has
sales
spread
over
200
markets,
thus
the
impact
of
exchange
rate
fluctuations
is
inevitable.
Regardless,
the
BAT
sees
the
quarterly
performance
as
an
improvement
from
previous
quarterly
results
when
assessed
with
constant
rates
of
exchange.
The
announcement
of
an
increase
in
dividends
further
reinstates
the
fact
that
management
is
confident
about
the
progressing
trend.
BAT
also
partakes
in
the
race
to
develop
alternatives
to
cigarettes,
as
do
its
competitors;
it
aims
to
conduct
customer
trials
of
a
tobacco-­‐heating
product
by
the
end
of
2015,
as
reported
by
BloombergBusiness.
Such
innovations
keep
BAT
at
the
top
of
the
market,
thus
investors
have
high
hopes
for
its
future.
Furthermore,
aggressive
inorganic
growth
is
evidence
of
the
mentioned
managerial
confidence,
as
seen
in
the
consideration
of
buying
out
Souza
Cruz
SA,
the
largest
tobacco
company
in
Brazil.
Results
from
the
Q2
reports
will
allow
a
more
thorough
assessment
of
the
capabilities
of
management
to
hedge
company
revenues
from
exchange
rate
volatility
and
the
success
of
acquisition
considerations.
For
now,
investors
wear
a
positive
attitude
in
response
to
BAT’s
performance.

5. Gambling
industry
Another
industry
reliant
on
guilty
pleasures,
gambling
managed
to
generate
$15.1
billion
in
revenues
and
$424.8
million
in
profits,
as
at
2014.
The
glorious
figures
may
look
impressive,
however
comparative
to
the
previous
years,
they
aren’t;
highest
recorded
revenues
in
the
last
ten
years
is
approximately
$17.8
billion,
in
2005.
From
2007,
the
decline
is
explained
by
the
decreased
discretionary
spending,
as
many
focused
on
paying
off
credit
card
and
other
debts
instead.
In
addition
to
that,
there
are
other
reasons
that
analysts
have
attributed
to
the
potential
continuous
deceleration
of
this
industry.
These
are:
•
Prospering
economy:
In
a
healthy
economy,
leisure
time
is
expendable.
Though
earnings
will
increase
as
a
result
of
a
prospering
economy,
less
leisure
time
would
mean
less
gambling
opportunities.
Furthermore,
it
is
expected
that
prices
of
essentials
such
as
food
and
gas
are
going
to
increase
as
global
demand
supersedes
global
supply,
thus
there
will
be
less
to
spend
on
discretionary
activities.
•
Competition
from
the
US:
Canada’s
gambling
industry
is
reliant
on
the
boosted
demand
received
by
US
travellers.
Lately,
new
casinos
have
opened
up
close
to
the
border
-­‐
on
the
US
side
–
drawing
guests
away.
Though
the
strengthening
US
dollar
counteracts
this
effect,
it
won't
be
the
case
in
the
long
run,
as
more
casinos
are
opened.
•
Declining
profit
margins:
With
increasing
competition,
many
casinos
have
resorted
to
the
use
of
electronic
gaming
machines
(EGMs)
in
order
to
improve
efficiency,
reduce
wage
costs
and
appeal
to
younger
customers.
However
automating
everything
is
not
possible,
and
thus
expenses
will
remain.
The
industry
concentration
is
likely
to
rise,
and
thus
rivalry
will
force
companies
to
lower
profit
margins
even
further
in
order
to
remain
competitive,
reducing
industry
profits.
Going
against
the
grain,
the
Ontario
Lottery
and
Gaming
Corporation
has
shown
constant
revenues
and
profits,
as
discussed
belowxi.
Market
dominator:
Ontario
Lottery
and
Gaming
Corporation
With
approximately
33.1%
of
market
share,
this
Government
of
Ontario
corporation
is
responsible
for
the
province’s
lotteries,
commercial
casinos
and
other
games
of
chance.
It
is
further
liable
for
four
resort
casinos
and
slot
machines
at
horseracing
tracks.
Its
stable
revenues
and
profits
(shown
in
figure
3)
allow
the
fulfillment
of
conducting
social
practices
that
eradicate
problem
gambling
and
at
the
same
time
provide
an
economic
return
to
the
people.
Being
a
private
equity
firm,
it
is
not
accountable
to
disclose
quarterly
reports,
however
its
annual
reports
provide
evidence
of
innovation,
as
they
introduce
new
gaming
mediums
such
as
an
online
platform,
and
their
ability
to
withstand
the
decelerating
industry.

6.
Conclusion
Activities
of
sin
will
forever
remain
in
human
life;
with
good
there
will
always
be
evil.
However
partaking
in
the
encouragement
of
the
sins
is
a
choice
one
has
to
make.
Once
the
principles
are
forgotten,
and
these
companies
are
looked
at
purely
from
an
investing
lens,
their
value
will
be
realized.
The
high
performing
industries
with
their
addictive
nature
allows
for
steady
cash
flows
in
a
diversified
portfolio.
The
heavily
regulated
industries
force
each
company
to
follow
rules
and
minimize
potential
risks
of
closure.
Competition
levels
are
high
as
many
attempt
to
capture
the
excess
profits
in
the
market;
however
new
entrants
find
it
difficult
to
enter
since
most
of
the
industries
require
heavy
investments
in
capital.
All
said
and
done,
these
industries
are
not
to
be
overlooked
by
investors,
as
they
can
easily
be
their
cashcows.
i
MarketLine industry profile– Alcoholic Drinks in US
ii
MarketLine industry profile– Alcoholic Drinks in Canada
iii
IBIS World industry report 44531CA – Beer, Wine and Liquor stores in Canada
iv
MarketLine industry profile– Alcoholic Drinks in Canada
v
AB InBev First Quarter 2015 Results
vi
Rosevear, John. "The Best Stocks to Invest in Alcohol." The Motley Fool, 25 May 2015. Web. 24 June
2015.
vii
"Federal Regulations." Federal Regulations. Health Canada, 30 Nov. 2011. Web. 24 June 2015. <
viii
Buckner, Dianne. "New E-cigarette Industry Says Regulations off the Mark." CBCnews. CBC/Radio
Canada, 09 Apr. 2015. Web. 24 June 2015.
ix
MarketLine industry profile– Tobacco in Canada
x
MarketLine industry profile– Tobacco in Canada
xi xi
IBIS World industry report 71320CA – Gambling in Canada