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Which company made the comeback of the year on Wall Street? One strong
candidate would be food and tobacco giant Philip Morris (MO
). Its stock has risen from the ashes of litigation fears to become one of the best performers in the Dow Jones industrial average this year.
The situation wasn't always so rosy. Earlier this year, jitters over the
billions of dollars awarded to plaintiffs suing the tobacco industry made the
stock about as popular with investors as the Marlboro Man at a SmokeEnders
class. But these days, with an IPO of its Kraft Foods business in the works,
the recent acquisition of Nabisco Holdings, and a "tobacco friendly"
administration setting up shop in the White House, the company is shaking off
the ghosts of litigation past. It now seems poised to again outperform the
broader market in 2001.
What's behind the changed outlook? Analysts say the tobacco giant is gaining
market share in most of its product categories around the world. They predict
an earnings-per-share growth rate of roughly 14%. "We think that the company is
in the process of accelerating its earnings performance to a level that will
really set the pace in the consumer-products area over the next few years,"
says Goldman Sachs analyst Mark Cohen.
COMFORT FOODS. With George W. Bush in the Oval Office, the company is less likely to face tough litigation and the constant tax increases it might have faced under the Democrats. The Justice Dept., pressured by the Clinton Administration, has filed a lawsuit against the tobacco industry in an effort to recoup the expense of treating people with smoking-related illnesses.
With legal challenges fading, Philip Morris is being viewed as a classic defensive play. While the bellwether tech stocks have plummeted, its shares have soared 140% since February, reaching a 52-week high on Dec. 20 of $44.50. The Dow, by contrast, is down 10.25%.
Investors know that sales of Philip Morris products tend to hold up relatively well during economic slowdowns. Philip Morris sells "alcohol [Miller Brewing], tobacco, and food, which is about as defensive as you can get," says S&P analyst Richard Joy. Plus, adds S&P sector strategist Sam Stovall: "Investors feel that the worst is already built into these prices and that legislators can't squeeze these companies too hard."
Philip Morris also has helped its own case with investors. It has just finished acquiring Nabisco Holdings, paving the way for one of the biggest IPOs in history by selling off a stake in the Nabisco and Kraft food businesses. Kraft is the largest packaged-food company in North America, thanks to products such as its cheese products, Oscar Mayer and Louis Rich processed meats, Maxwell House coffee, and Post cereals. Philip Morris has said it plans to sell 10% to 15% of the combined operations in the first half of 2001 and use proceeds from the offering to pay off the debt it assumed as part of the Nabisco deal.
KICKING BUTT. Current Philip Morris shareholders won't receive any stock of Kraft in the deal. However, they could benefit indirectly as the debt payoff bolsters the company's balance sheet. If the IPO is as successful as many expect, Philip Morris, which will retain a 85% stake in the food business, could get a big boost in share price. According to Joy, the food company by itself could trade at more than 20 times forward earnings, vs. 10 times for Philip Morris now. "Next year, once people get a really get a feel for what the environment for these stocks will be, they'll do really well," he says. "Philip Morris is the best tobacco company out there. It's a cash machine."
The legal environment for Big Tobacco also has been improving over the last several years and is likely to continue to do so, says David Adelman, an analyst at Morgan Stanley Dean Witter. "The risk of unforeseen adverse developments will substantially decline with the Clinton Administration leaving Washington."
The two major claims against Big Tobacco are the Justice lawsuit, which is expected to be dismissed by the Bush Administration, and the Florida class-action, where there was a $146 billion verdict. "But it's a long road. [The Florida suit] could be dismissed in two to four years," Adelman says.
NEW FLAREUPS? Litigation and regulatory concerns are still a possibility, of course. "The nature of the tobacco industry is [that] from time to time, there will be new issues that flare up," says Adelman. "A new lawsuit, or a new allegation and so forth. I don't think there's going to be anything that's particularly troublesome or worrisome."
But there's little doubt that Big Mo's shares represent a defensive oasis in a tumultuous market. Even with its impressive rise, Joy believes that Philip Morris "still has plenty of upside." That might not qualify it for another comeback-of-the-year nomination, but Philip Morris' shareholders would hardly complain.
By Alan Hughes in New York Edited by Thane Peterson
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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