AP NEWS
Related topics

Tobacco Stocks Riding Favorable Court Rulings

August 27, 1987

ATLANTA (AP) _ Tobacco stocks are smoking, fanned by recent favorable court decisions analysts say will keep prices rising despite profit-taking that surfaced Thursday.

Tobacco stocks have been among the most active for several days of trading, rising daily after a federal appeals court ruling a week ago in Atlanta and another on Tuesday in Boston that required warning labels on cigarette packs can protect tobacco companies from product liability lawsuits.

Prior to Thursday’s profit-taking, with some investors selling their shares to cash in gains, several tobacco issues rose as much as 14 percent in 3 1/2 days of trading. Analysts say the trend will continue and the stocks will outperform the overall stock market.

″For a long time, investors have been very queasy about litigation risks,″ said Kurt Feuerman, a tobacco analyst with investment firm Drexel Burnham Lambert Inc. in New York.

″What’s happened in the last week is the litigation outlook has improved dramatically. You can’t rule it out yet, but you’re much closer to being able to do so,″ Feuerman said.

The 11th U.S. Circuit Court of Appeals in Atlanta ruled Aug. 21 that American Brands Inc. could use the so-called pre-emption defense in a lawsuit brought by a Florida woman, who claimed the company was responsible for her husband’s death because it had not adequately warned him of the dangers of smoking.

The First U.S. Circuit Court of Appeals in Boston followed Tuesday with an even broader ruling supporting the industry in a case involving Liggett and Myers Tobacco Co.

A third decision involving similar issues is pending in the Sixth U.S. Circuit Court of Appeals in Cincinnati. About 120 cases remain in various lower courts.

Within hours of the Atlanta court’s decision, tobacco stocks began a climb that was boosted Tuesday and continued until Thursday.

RJR Nabisco Inc. opened Aug. 21 at $61.50 a share, but rose $3 between news of the Atlanta court’s decision at around noon and the 4 p.m. close of the New York Stock Exchange. The stock closed Wednesday of this week at 70.37 1/2 , a 14.4 percent increase since last week.

Philip Morris Companies Inc., which opened Aug. 21 at $106.75 a share, closed Wednesday at $122.37 1/2 for a 14.6 percent gain. American Brands went up 13.6 percent, from $52.50 a share to $59.62 1/2 , and U.S. Tobacco rose 12.8 percent, from $28.25 to $31.87 1/2 .

But in closing trading on Thursday, Philip Morris fell $3.75 to $118.62 1/2 , RJR Nabisco was down $2.25 to $68.25 and American Brands dipped 87.5 cents to $58.62 1/2 .

″In the next week, you’ll probably see a slowdown as people take a step back, maybe take some profits,″ Feuerman said.

″The (tobacco) stock prices are reacting to a change in reality. They’ve been really, really cheap - absurdly cheap - due to the litigation threat,″ he added.

Feuerman also suggested that the industry may change as tobacco companies use their heavy cash flow to diversify and restructure. He said the threat of huge damage awards would have made such moves difficult to finance.

Lawrence Adelman, an analyst with Dean Witter Reynolds Inc. in New York, said the tobacco firms have been ″very good profit companies,″ with strong earnings and dividends, but undervalued stock prices.

He cautioned, however, that the tobacco industry’s growth rate will gradually decline because of the decline in smoking. ″We don’t think the legal cases are going to change the consumption patterns,″ he said.

U.S. tobacco consumption per capita has declined in the last 20 years.

″We would expect the stocks to rise substantially, even at current prices,″ said Roy D. Burry, analyst with Kidder Peabody & Co. Inc. in New York.

″The industry has the perfect record of winning cases, and presumably, in our opinion, they will continue to go on winning,″ Burry said. ″It’s the third strike in the last of the ninth and the batter has gone back to the dugout and the teams are leaving the field.″

Even anti-tobacco groups admit the fight is getting tougher.

″Every time you get a favorable decision, it sort of lightens the liability threat,″ said David Gidmark, editor of a newsletter for the Tobacco Products Liability Project in Boston. The project was established in December 1984 to foster products liability litigation against the tobacco industry and to remove or restrict the product in the market.

Gidmark said tobacco liability cases will still be tried. ″There are millions and millions of people who have read the publicity in the last couple of days who are going to be very surprised eight weeks from now when a tobacco trial opens in New Jersey,″ he said.

Gidmark insisted that ″It’s not over yet,″ despite the two recent decisions and a similar ruling earlier from a federal court in Philadelphia.

AP RADIO
Update hourly