Tobacco shares feel heat of new lawsuits, Fed rate cuts
NEW YORK, March 20 (Reuters) - Tobacco-related shares skidded on Tuesday, amid news of new lawsuits and the U.S. Federal Reserve's interest-rate cut. But industry watchers still assert that the companies will continue to post solid gains in their share pr
``Whenever you have a fed funds rate cut, there is money that leaves the defensive sectors, like tobacco, to go into the growth areas of the market,'' said Salomon Smith Barney tobacco industry analyst Martin Feldman. However, ``today's fall in the tobacco stock prices seems inappropriate to me.''
The central bank cut its key federal funds rate, the overnight bank lending rate, by 50 basis points to 5.00 percent from 5.50 percent on Tuesday afternoon.
Several factors are hitting tobacco stocks, said Tim Drake, consumer nondurables analyst at Banc One Investment Advisors.
``The biggest one right now would be momentum players coming out of defensive stocks positioned to go into offensive stocks, tech stocks, after the Fed move,'' Drake said.
Shares of Philip Morris Cos. Inc., the world's largest tobacco company with the leading Marlboro brand, slid as low as $44.25 in Tuesday trading on the New York Stock Exchange, after closing at $47.15 on Monday. Meanwhile, shares of R.J. Reynolds Tobacco Holdings Inc., parent of the No. 2 U.S. tobacco company, R.J. Reynolds Tobacco Co., fell as low as $52.45 after closing at $54.95 on Monday. Both companies' shares had been on steady climbs in recent months following strong performances in 2000 and amid an easing litigation environment.
Feldman noted that two new tobacco-related trials started on Monday, an individual trial of a case known as Boeken in California, and a Blue Cross Blue Shield claim in a New York court.
``Neither claim is likely to survive appeal court scrutiny, but in the short term, the valuations tell us that some investors are nervous about these claims,'' Feldman said.
Furthermore, five U.S. states filed suit against R.J. Reynolds on Monday, alleging that some of the cigarette maker's advertising and marketing practices violate the landmark 1998 Master Settlement Agreement.
Both Feldman and Credit Suisse First Boston analyst Bonnie Herzog said they do not think the suits, brought by attorney generals from Arizona, California, New York, Ohio and Washington are affecting tobacco-related shares.
``I don't think that has any affect on the stocks right now,'' Herzog said. ``I don't think that that is a big issue.''
NEW CASES RAISE CONCERN, FUNDAMENTALS STILL STRONG
But the stream of new lawsuits, along with individual claims filed by flight attendants in Florida, is bringing tobacco-related litigation back into view after several months with no major court rulings. The flight attendants are seeking individual damages after settlement of a 1998 case, known as ``Broin,'' based on illnesses that allegedly stemmed from second-hand smoke in airplanes.
Herzog said cases such as ``Broin'' should already be priced in to the stock valuations.
While this week's new tobacco trials and the lawsuits filed against R.J. Reynolds are not big stumbling blocks on an individual basis, Drake said that taken together, they raise red flags for investors that the legal environment could still be an issue.
Even so, industry analysts are pleased with the companies' performances.
``I think that the stocks will recover from today's falls in the short term,'' Feldman said. "There's nothing on the fundamental front that worries me about the group.
``Tobacco will buck the trend of so many other sectors by reporting EPS growth in 2001 in line with or ahead of expectations.''
And Herzog said she still sees the stocks, particularly Philip Morris, as buying opportunities.
Tobacco-related shares rebounded slightly on Tuesday afternoon. New York-based Philip Morris' shares closed off $2.24, or 4.75 percent, at $44.91, and shares of Winston-Salem, N.C.-based R.J. Reynolds were down $2.30, or 4.19 percent, at $52.65. The Standard & Poor's Tobacco index (^SPTOBC - news), which is comprised of nine tobacco-related companies, ended the session off 112.17, or 4.66 percent, at 2,295.36, after sinking as low as 2,262.42.