More analysis, less hysteria in this reasoned article f/Minn.
Smokers will pay price of settlement
Mike Meyers / Star Tribune
Smokers, not tobacco barons, will pay most of the price of the
Minnesota settlement, Wall Street analysts say. But even a
$7.035 billion settlement paid out over 25 years will translate
into just a few pennies a pack in higher cigarette prices and a
minuscule decline in sales, experts said.
"In the grand scheme of things, it's not going to cause the
industry that much hardship," said Gary Black, securities analyst
at Sanford C. Bernstein & Co., a New York stock brokerage firm.
The deal caused hardly a puff of concern on Wall Street on
Friday. Although the details of the settlement came near the
market close, leaks had been dribbling onto financial wires all
day long.
Even so, big tobacco company stocks hardly budged -- up or down.
"In general, this type of settlement was built into the price of
the stocks," said Timothy Swanson, securities analyst at A.G.
Edwards in St. Louis. "That's what the market seems to be
saying." The amounts of money involved will not present a major
financial blow to Big Tobacco, he added.
However, the leader of a group that has encouraged lawsuits
against cigarette makers said the long-term financial
consequences to the tobacco industry are impossible to
measure, with nearly 1,000 suits pending.
"It's a long line, and it's going to get longer," said Richard
Daynard, chairman of the Tobacco Products Liability Project and
law professor at Northeastern University Law School in Boston.
"There may be more to this than the money going to Minnesota,"
he said. "The states that haven't settled have a new benchmark." Plus, he said, cigarette makers still have to face class-action suits and cases brought by individuals, union health
and welfare funds, HMOs and insurance carriers.
Short-term hit Nevertheless, any short-term hit to the bottom line of cigarette makers from the settlement will be relatively small when
measured against the yardstick of industry profits, said Black
and others who watch tobacco companies' financial performance.
Tobacco companies last year had pretax profits of $7.7 billion,
leaving cigarette makers plenty of cash even after writing large
checks to litigants in Minnesota and other states. And most of
those checks will be written on revenue from higher prices
instead of being taken out of profits, Black said.
By Black's arithmetic, the Minnesota settlement, together with
tobacco agreements reached recently in suits in Texas, Florida
and Mississippi, will translate into a price increase of no more
than 12 cents a pack.
"That's not bad on an average pack of cigarettes that already
costs $2," he said. "A 6 percent price hike leads to a 2.4 percent
deline in volume."
Others on Wall Street agreed.
"A settlement in this case . . . is not going to undermine the
financial viability of the leading U.S. cigarette manufacturers,"
said David Adelman, securities analyst at Morgan Stanley. "It's
going to result in modestly higher cigarette prices than
otherwise would have been the case. But that's it."
Cigarette companies weren't using the settlement as an occasion
to announce price increases, however. Spokesmen for Philip
Morris and RJR said they were unprepared to answer questions
about the future of prices.
The attitude on Wall Street was mirrored on Main Street.
"The tobacco companies aren't going to offer $6 billion if they
can't overcome it," said Randy Segal, owner of Segal Wholesale,
a Minneapolis tobacco wholesaler and retailer.
More competitors Financial analysts foresee perverse consequences when -- not if -- tobacco companies raise cigarette prices to pay the bills run up at the courthouse.
For one thing, the state of Minnesota will find itself with a stake
in the survival of tobacco companies in order to collect annual
settlement payments over the next 25 years.
For another, analysts predict, more rather than fewer companies
will be selling cigarettes and the lure of illicit sales by
bootleggers will be on the rise.
Settlements "add costs that a new entrant [to cigarette making]
would not have to pay," Black said. Under the circumstances, he
said, the more the tobacco companies raise prices, the greater
the incentive for new makers of cigarettes to enter the business
and undercut prices.
What's more, the higher cigarette prices go, the faster
bootleggers will appear, said Lindsay Hutter of the National
Association of Convenience Stores.
from Minneapolis StarNews |
