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VIDEOInvestors Light Up as Cigarette Makers Move Higher
By
Josh Lipton Jun 28, 2010 4:25 pm
Investors move in after Supreme Court ruling.
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The US Supreme Court upheld a federal judge’s ruling that the tobacco industry did illegally collaborate to conceal the dangers of cigarettes, but the government can’t force Big Tobacco to forfeit billions of dollars in order to bankroll a national anti-smoking campaign.
How much money, really, was Uncle Sam looking to extract from those cigarette makers?
Try nearly $300 billion.
So the headline-making news, says Morningstar analyst Philip Gorham, means the tobacco industry can breathe a sigh of relief as the potential payout could have put a material dent in its free cash flow for many years to come.
With the government’s racketeering case now settled, the analyst says, the companies’ solid cash-flow generation should ensure that the manufacturers can absorb any payouts without risk to their financial viability.
In response, investors lit up the shares of cigarette manufactures: In afternoon trading, Altria (MO), Reynolds American (RAI), and Lorillard (LO) were up 3.8%, 4.7%, and 3.1%, respectively.
Gorham reminds us that Altria is the largest player in US tobacco manufacturing, with just more than 50% market share. Its nearest rivals are Reynolds American (29%) and Lorillard (12%).
The case is now expected to return to the district court for further proceedings, said Altria in a written statement on its website, adding, “Although we are disappointed that the Supreme Court did not grant our petitions challenging the basis for the lawsuit, we are pleased that the Supreme Court has confirmed once again that disgorgement is not an available remedy.”
Esther Kwon, S&P’s tobacco and gaming analyst, told clients in a note published today that she suspected the Obama administration would have had difficulty moving forward with the case, given Supreme Court nominee Elena Kagan, who signed original appeal, would have had to recuse herself if successfully confirmed.
Kwon maintains a positive fundamental outlook on the tobacco sub-industry. The analyst currently recommends MO as a Strong Buy and RAI and LO as Buys.
No positions in stocks mentioned.
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