Tobacco reassessment after court verdicts
To the American tobacco industry, last week's verdict in the Cipollone case was a victory. Only the Liggett Group was held liable, the industry notes. And that was for $400,000, far less than the more than $2 million in legal costs tallied by the attorney for the family of Rose Cipollone. Mrs. Cipollone died in 1984 as a consequence of many years of smoking, her family maintains. Yet, while the dollar award was relatively small and the assessment was against only one of the tobacco companies being sued, the immediate reaction to the landmark case, as well as a number of political factors that are independent of legal challenges, suggests that the road ahead for the lucrative industry may not be quite as smooth as tobacco executives are saying publicly.
Major tobacco stocks fell after the Cipollone verdict in a Newark, N.J., courtroom last week. While the drops were modest, Wall Street in general was on an upward march, thanks to upbeat news on the trade front, with the announcement that April's merchandise trade deficit was the lowest since December 1984.
For the week, the Dow Jones industrial average closed up 2.31 points, at 2104.02.
By the end of the week, however, inflationary concerns had reignited within the financial community, stemming from worsening drought in the Midwestern United States. Commodity prices rose sharply and people in farm-related industries worried that they might be hurt by the adverse weather.
Although there are only about 100 lawsuits outstanding against tobacco companies, some legal experts expect that hundreds of additional suits will be filed in the years ahead. The industry, in fact, did win another case last week, a liability suit in the Midwest, but it was overshadowed by the Cipollone case, which was only a partial victory for the industry.
The initial legal suits against the asbestos industry, some analysts recalled, produced modest results, but by the end of the process the industry was staggered.
The political climate has become increasingly indifferent - if not hostile - to the tobacco industry. Restrictions on smoking are now required for many restaurants, offices, airliners, and other public areas.
After the Cipollone verdict, a number of brokerage companies revised their industry recommendations, although most seemed to want to take a wait-and-see attitude. Some revisions, such as that by A.G. Edwards & Sons Inc. of St. Louis, were modest.
While not changing his upbeat earnings projections for the industry, John C. Bierbusse, an A.G Edwards analyst, says that the ``Newark decision will have an effect on how individuals perceive the industry.'' Thus, he has changed his buy limits for major tobacco companies.
Outwardly, of course, the industry could not look stronger. Flush with cash, its overseas sales expanding, the business has prospered.
Virtually every company in the industry will see its earnings rise ``10 to 20 percent this year,'' says John C. Maxwell, an analyst with Wheat First Securities Inc., in Richmond, Va. The industry, he notes, has been at the forefront of modernization, which has lowered production costs.
Maxwell says the companies are doing something else to ensure their future: they are ``searching for the right types of firms'' to buy in a continuing quest for diversification away from tobacco. Prior acquisitions have been significant. In 1985, for example, R.J. Reynolds acquired Nabisco, and the Philip Morris Companies Inc. bought General Foods, both established food producers with favorable public acceptance.
Maxwell notes that a number of tobacco companies are buying their own stock, a shrewd move, he says, given their strong cash positions. Such buybacks shore up the companies' stock prices, following the volatility of recent months stemming from the court challenges.
Do the tobacco companies have a moral obligation to continue to diversify away from their main product, since the latest surgeon general's report on tobacco has called nicotine an ``addictive'' substance?
Mr. Bierbusse of A.G. Edwards questions whether there is any such obligation, since he does not feel the scientific evidence against the industry has been firmly established.
Non-industry studies, however, have frequently made a connection between smoking and health problems.