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Stock Analyst Update

Don't Panic over Big Tobacco Judgment

The gargantuan punitive damages almost certainly will not stand.

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Investors need not consider Friday's decision in the Engle case in Florida as the death knell for the tobacco industry.

Although the $145 billion punitive damage figure is staggering and would bankrupt the industry, it is nearly certain that the judgment won't be allowed to stand. Florida law prohibits any judgment from bankrupting a company. Consequently, the judge will almost certainly reduce the punitive damages. The trump card the tobacco companies will play, however, is to appeal the decision and hope to have the case overturned in a higher court. The companies have the resources to continue the appeals process for the next several years.

Jurors determined that the five leading tobacco companies, as well as two defunct trade organizations, should pay punitive damages of $145 billion. As the largest tobacco company in the United States, with a 50% market share, Philip Morris (MO) bears the brunt of the penalty with a $74 billion tab, followed by R.J. Reynolds (RJR) with a $36 billion payment. Other companies include Brown and Williamson, owned by British American Tobacco (BTI), Lorillard Tobacco, owned by Loews (LTR), and Liggett, the smallest of the corporate defendants, owned by Vector Group (VGR).

The stocks of the companies all ended the day off fractionally.

Hundreds of mutual funds are exposed to tobacco stocks. The manager of at least one of them was not up in arms about the ruling.

Portfolio manager Michael Sandler, who owns Philip Morris in Clipper (CFIMX) and UAM Clipper Focus (CLPRX), said he expects the tobacco industry to win on appeal. "Every level, federal and state, has indicated that class action is not the mechanism to litigate this issue," Sandler said.

Even if the decision stands, it could take three or four decades to sort out who should be eligible to collect on the verdict, Sandler said. Litigation risk is sure to remain for tobacco companies, but Sandler considers that part of the package. General Motors (GM) and Ford Motor (F) "have hundreds of lawsuits pending at any one time," he said. "We see Philip Morris in that light; we evaluate their lawsuits as a cost of doing business."


 Funds with the Highest Exposure to Tobacco Stocks
% in Tobacco Portfolio
YTD Return ( %  )
Yacktman Focused (YAFFX) 14.02 06-30-00 21.04
Yacktman (YACKX) 13.49 06-30-00 -3.82
Kemper-Dreman High Return Equity (KDHAX) 13.42 03-31-00 14.40
UAM Clipper Focus (CLPRX) 12.14 03-31-00 0.16
Clipper (CFIMX) 9.83 03-31-00 32.95
Fidelity Select Food & Agriculture (FDFAX) 7.67 02-29-00 -13.67
Hennessy Leveraged Dogs (HDOGX) 7.21 03-31-00 -7.25
CGM Mutual (LOMMX) 7.16 12-31-98 -10.69
SunAmerica Dogs of Wall Street (SDWAX) 6.11 05-31-00 28.14
Hennessy Balanced (HBFBX) 5.64 06-30-00 7.68
Morningstar data through 07-13-00. analyst Christopher Traulsen contributed to this report.

Aaron Westrate has a position in the following securities mentioned above: CFIMX. Find out about Morningstar’s editorial policies.