Posted by: audreybenenati | February 1, 2010

Tobacco Can’t Shake Off Legal Addiction


By JOHN JANNARONE

Tobacco is a tropical plant that has adapted to withstand harsher climates. After years of bumper harvests, it is easy to forget how vulnerable it can be.

Heard On The Street columnist John Jannarone explains to Simon Constable why rising litigation in the U.S. means investors might want to look at Philip Morris International rather than the domestic tobacco firms.

Cigarette makers have started to get used to an easy environment recently, as lawsuits have all but disappeared. In 2008, not a single ruling was made against the industry by a U.S. court. That has allowed shares of tobacco giants Altria Group and Lorillard to rise about 35% since the start of last year, without the cloud of litigation hanging over them.

But a number of verdicts in so-called Engle cases are again raising the specter of costly lawsuits. Engle cases are a threat to big tobacco because they let plaintiffs use a previous court finding that smoking causes cancer and companies made false statements about their products.

In the next several months, many more Engle cases will likely go to trial, along with possible suits related to cigarettes labeled "light." Morgan Stanley’s David Adelman says total damages could potentially amount to hundreds of millions of dollars in the next two to three years.

Yet share prices don’t appear to reflect such danger. Consider Philip Morris International, which sells tobacco exclusively outside the U.S. and faces no domestic legal risk. Its shares trade at 12.2 times 2010 consensus earnings. Its premium to the U.S. tobacco companies has narrowed over the past year, with Altria trading at 10.7 times 2010 earnings and Lorillard at 12.1 times.

Mr. Adelman says tobacco companies have never paid material health-related damages or settlements outside the U.S.

Read the rest at http://online.wsj.com/article_email/SB10001424052748703389004575033374093802594-lMyQjAxMTAwMDMwMTEzNDEyWj.html

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