From Merrill Lynch, response to "September 23, 1998 WSJ Article on Price Discounting":
We doubt that the weakness in tobacco stocks reflects any concern about a rise in price discounting. Philip Morris shares touched their historic high the previous day as the odds for a tobacco settlement by the remaining 46 states appears more imminent. The small decline we saw yesterday appears to be more a correction from the rise we have seen in recent days rather than a reaction to what could be considered an adverse article.
The settlement appears to be moving closer to fruition. From what we understand, the nine attorneys general who are negotiating are conferring with the remaining states to see how many would be willing to come on board with the terms they have agreed upon.
Price discounting has undoubtedly accelerated as the likelihood of a settlement grows closer, as the industry will not likely be able to advertise and promote as aggressively under the terms of the settlement.
There is some concern that the current high level of price promotions will hurt profit margins. This has not been the case thus far. Profits per pack continue to show good growth, as has been the case since the trough in April 1993 after Philip Morris cut prices on Marlboro.
And Ralph, I stick to my gut instinct that there will be some mechanism that will coordinate the tobacco tax so that no state gets a benefit through a lower tax of some sort. The tax increase should provide stable earnings, however, if the price is too high, demand will erode. We really need to wait and see what the settlement looks like. As for a new McCain bill, I can't imagine something like that gaining momentum if the states are settled. The Congress would be able to simply shrug off the duty of coming up with a comprehensive bill. Instead, I expect HUGE challenges from the advertising and marketing industry, as well as from the convenience stores, that challenge any settlement that restricts marketing too much as unconstitutional. We will see, there will always be excitement in the tobacco wars, but the settlement will act as a cease-fire of sorts for the intermediate term as tobacco regroups for the next major battle, IMVHO.
Best of luck, and I remain long MO,
geoff |
