Tobacco Faces More Challenges
NEW YORK (AP) -- A year after agreeing to pay billions of dollars to settle state government claims for treating sick smokers, Big Tobacco still faces a pack of problems.
Price increases imposed to pay for the settlement helped trigger the steepest slide in cigarette sales since the depth of the Great Depression. That helped push down tobacco company profits. And the industry still faces potentially crippling legal challenges. As a result, tobacco company stocks are now near their all-time lows.
Settling with the states was ``a great mistake'' for the industry, says veteran tobacco industry analyst John C. Maxwell. He argues the deal with the states emboldened others to take on tobacco companies in court and increased public awareness that cigarettes are dangerous products.
But other analysts said the settlement eliminated the biggest legal threat to the industry which otherwise faced one state lawsuit after another, any one of which could have resulted in a multibillion-dollar judgment that may have driven smaller companies out of business.
``It was a painful move, but it was the right thing to do,'' said David Adelman, tobacco analyst for Morgan Stanley Dean Witter.
Industry leaders say they have no regrets about the settlement, were prepared for the declines in sales volume and profits and expect to prevail in pending legal cases.
``We don't have any second thoughts,'' said Ellen Merlo, a spokeswoman for the nation's biggest tobacco company, Philip Morris USA, the maker of Marlboros. She said the sales decline has not been precipitous and said the settlement helped improve dialogue between the industry and its critics.
R.J. Reynolds Tobacco, the second biggest U.S. tobacco company with brands like Camel and Winston, similarly harbors no misgivings about the settlement, said its general counsel Charles Blixt. ``We still believe these cases didn't have legal merit, but the risk to the company was outweighed by the terms of this settlement,'' he said.
The five major tobacco makers agreed last November to pay $206 billion over 25 years to settle lawsuits brought by 46 states who wanted reimbursement for their costs for treating smoking-related illnesses. The other four states previously settled for a combined $40 billion.
The tobacco companies also agreed to marketing restrictions including bans on tobacco billboards and cartoon advertising characters like Joe Camel.
The elimination of the ominous legal threat from the states pushed tobacco stocks to new highs after the settlement. But the industry's weaker financial performance and investor worries about continuing legal battles with smokers in Florida, the federal government and others have dragged the stocks down sharply.
To help pay for the settlement, tobacco companies hiked wholesale prices by a whopping 63 cents a pack, or 28 percent, over the past year.
At the retail level, a pack of cigarettes cost $2.88 on average this year compared with $2.20 in 1998, according to figures from Martin Feldman, who tracks the tobacco industry for Salomon Smith Barney.
The price hikes and the marketing restrictions fueled an 8.6 percent slide in cigarettes sold in the United States this year, the U.S. Department of Agriculture's Economic Research Service estimated. That's shaping up to be the steepest yearly dropoff since a 9.8 percent plunge in 1932. Cigarette consumption had previously been steady or down between 1 percent and 3 percent in recent years.
Domestic tobacco profits will be 10 percent lower this year, predicts Marc Cohen, tobacco analyst at Goldman Sachs & Co.
But analysts blame worries over legal liability as the biggest reason for tobacco's slump on Wall Street.
The federal government sued the industry to recover the billions of dollars it spends on smoking-related illnesses. A jury in Miami has ruled that cigarettes are defective and is now considering whether damages should be assessed. Hundreds of other cases by individuals, insurance funds, foreign governments and others are also pending.
Philip Morris's experience illustrates the industry's stock troubles.
Its shares rose on post-settlement euphoria to a high of $59.50 in November 1998, but dropped as low as $21.25 late last month as the industry's legal prospects appeared to grow bleaker. Its shares have since recovered to about $26 a share.
Even with its problems, the tobacco industry remains enormously profitable.
Salomon Smith Barney's Feldman expects Philip Morris's domestic tobacco profits will slip to $5.12 billion this year from $5.19 billion last year.
Even at that, he said the domestic tobacco business would rank among the most profitable in America.