NEW YORK — Fed up with seemingly endless cigarette litigation, investors are kicking the habit in droves.
Tobacco shares have long suffered from litigation fears but now appear to be tanking as never before. An adverse court ruling in Florida pummeled tobacco stocks to multiyear lows Thursday, although they recovered slightly Friday.
Realistically or not, Wall Street is acting as though the value of the entire U.S. tobacco industry, with retail sales of $50 billion last year, is less than zero--in fact, many billions of dollars less.
The stock slump doesn't directly affect the companies' operations--they still rake in their profits--but it increases the pressure on the firms to reach some legal solution to the morass, either through settlements or outright victory.
And because Big Tobacco stocks are so widely held in mutual and pension funds, millions of Americans share the pain, regardless of how they feel about smoking.
The huge settlement last year between the industry and the states led many investors to hope it was putting its problems in the past. Instead, investors are now worried that there will never be an end to the litigation and that future increases in the price of cigarettes will go to litigants rather than shareholders.
From a peak of $58.25 a share last November, the stock of market leader Philip Morris Cos., maker of Marlboro, has plunged to $24.75, losing nearly 60% of its value--more than $80 billion in all.
"The market is saying this company is going bankrupt," said Robert Sanborn, whose Oakmark Fund owns 10 million shares. He hastened to add that he holds the opposite view.
Philip Morris, remember, also owns Kraft Foods and Miller Brewing Co., which by themselves ought to be worth $24 a share, said industry analyst Martin Feldman of Salomon Smith Barney. He estimated the overseas tobacco operations--not subject to U.S. litigation--at an additional $33 a share.
Therefore, at Philip Morris' current share price, and with 2.4 billion shares in the market, investors are valuing its U.S. tobacco business at negative $70 billion, Feldman said.
Shares of other cigarette makers, including R.J. Reynolds Tobacco Holdings (Winston and Camel); British American Tobacco, parent of Brown & Williamson Tobacco Co. (Kool); and Loews Corp., parent of Lorillard Tobacco Co. (Kent and Newport), also have fallen.
Feldman and other analysts insist that this represents a huge overreaction to the Florida case and to tobacco's legal problems in general.
