Ralph, I bought OmniPage, and now I'm ready to scan and post! Theo
VALUE LINE UPDATE
TOBACCO INDUSTRY
1582
The Tobacco Industry managed to avoid sweeping, and -potentially crippling, federal legislation in 1998, but several * imposing obstacles still lie ahead. Big Tobacco successfully negotiated a $206 billion, 25-year settlement with. the attorneys general of 46 states late last year, thereby avoiding any future state or city class-action suits. Nevertheless, President Clinton, in his recent State of the Union address to the country, announced plans for the federal government to sue the industry in order to reduce teenage smoking. In the meantime, the landmark Engle case, the first class-action suit involving smokers . has gone to trial in Florida, and hundreds of personal injury. Cases are currently working their way through the, courts.
Several tobacco stocks appreciated.-by 100/c to 20% late last year following the aforementioned settlement news, but have given back most of these gains of late. Tobacco stocks will likely continue to gyrate quite a bit in 1999, and these equities are only appropriate for risk-tolerant investors. But, unlike the highly speculative Internet sector, for example, there are a number of companies in the industry that offer respectable value for the dollar.
Rising Prices, Declining Consumption~
Tobacco companies raised wholesale cigarette prices by close to $0.50 a pack at the end of 1998 to offset expenses stemming from the $206 billion Medicaid settlement with 46 states. In addition to the upcoming' cash payments, the settlement imposes a number, of new marketing restrictions, including a ban on outdoor billboards, transit signs, branded merchandise, product placement in movies, cartoons in advertising, and all but one. sponsorship per manufacturer. The price increase alone may lower tobacco usage by as much as 10% in 1999. However, there are several other factors in play that may lower consumption even further. For instance, California's Proposition Ten, narrowly passed in last year's election, will raise cigarette taxes in the country's most populous state by $0.50 a pack. President Clinton is also advocating raising federal tobacco taxes by an additional $0.55 a pack. The widening array and increasing popularity of smoking-cessation products and programs will also likely put a small dent in U.S. tobacco consumption.
L INDUSTRY TIMELINESS: 28 (of 95)
Given the shrinking domestic market, the top two players in the industry, Philip Morris and RJR Nabisco, continue to aggressively expand their -overseas operations. However, foreign growth rates moderated considerably in 1998, mainly due to poor economic conditions in Asia and Eastern Europe. Moreover, several potentially lucrative overseas markets, such as China, remain closed off for the most part. The government bodies in these regions produce their own I cigarettes, and they certainly have no intention of sharing the revenues with U.S,. tobacco companies. Consequently, the massive over seas growth rates achieved. throughout most of this decade may be a thing of-the past.
The Litigation Calendar
The Tobacco Industry enters 1999 with its nearly spotless courtroom track record pretty much intact. The only two cases Big Tobacco ever lost, the Carter and Widdick trials, were both overturned last year. Therefore, the industry can still boast that it has never lost a single case. The.Florida Supreme Court, though, will soon be rendering a final decision on the Carter* case. Florida is probably-the least hospitable courtroom venue in the nation for the industry, and an ultimate dismissal of Carter would be a major victory.
On the class-action front, Big Tobacco faces its stiffest challenge to date, the Engle case in Florida. Another third-party healthcare cost case, the Ohio Iron Workers, may also work its way to trial before the end of 1999.
Investment Advice
As previously stated, investors should be aware of the
large inherent risks of litigation and legislation to the
industry as a whole. Philip Morris is the only stock that
is ranked favorably for price performance in the year
ahead. The company continues to build on its leading
position in the domestic tobacco market, primarily at the
expense of its main competitor, RJR Nabisco.
The pickings appear. to be equally as slim for accounts seeking attractive, long-term growth. Tobacco consumption in the U.S. is expected to gradually decline over the next several years, and foreign tobacco revenues may not, be able to. pick up all of the-slack. |
