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Tobacco Industry |
HenryTo
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Joined: 06 Aug 2004
Posts: 11743
Location: Los Angeles, California
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 Posted: Tue May 26, 2009 11:14 am Post subject: Tobacco Industry |
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Morningstar's latest views on the tobacco industry:
| Quote: | We are maintaining our fair value estimates for the tobacco companies following a decision on Friday by the U.S. Court of Appeals in Washington to uphold the major elements of a 2006 ruling that found the leading U.S. cigarette manufacturers guilty of racketeering. Although we view this ruling is a setback for the tobacco firms, we do not think it affects our fair value estimates at this stage.
In the original trial, prosecutors accused tobacco firms of collaborating to restrict the debate on the dangers of smoking in order to deceive the public. Friday's ruling could lead to a ban on labels such as "light," "low tar," and "mild" which imply that some products are less harmful than others. It could also allow the Department of Justice to prosecute companies that continue the unlawful practices highlighted in the case, and this could lead to financial penalties being imposed in the future.
Although the defeat in the Court of Appeals is a blow to the tobacco industry, there were some favorable elements in the ruling. The original decisions that the government could neither force the tobacco companies to repay $280 billion in profit generated from the malpractice, nor force them to fund a $10 billion smoking cessation program, were both upheld. This piece of the ruling is important, in our view, because it reaffirms the previous decisions of several courts to avoid imposing a financial penalty so severe that the future of tobacco manufacturers as going concerns would be jeopardized. Although the original ruling ordered tobacco firms to issue statements on their Web site to inform readers of the damaging nature of their products, this requirement is unlikely to be imposed while the case is still under appeal. Altria MO and Reynolds American RAI will now appeal to the U.S. Supreme Court, and we expect the remaining defendants-- Lorillard LO and British American Tobacco BTI--to follow suit.
Although this ruling itself imposes no financial penalties on tobacco manufacturers, we are concerned that it could open the door to future prosecutions by the Department of Justice. However, we think we have suitably accounted for the risk of litigation in our valuation of the tobacco manufacturers, and until the magnitude of potential penalties becomes apparent, we do not intend to adjust our fair value estimates as a result of this ruling. |
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Tobacco Industry Replies |
HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 11743
Location: Los Angeles, California
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| Posted: Wed Jul 06, 2011 4:22 pm Post subject: |
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Morningstar on Australia's new tobacco legislation:
| Quote: | | A long-awaited bill was introduced in Australia's parliament Wednesday to force cigarette manufacturers to sell their products in plain packs. Under the proposed laws, Canberra will ban the use of logos, branding, trademarks, and colors starting January 2012; brand names will appear in standard colors and fonts on dark olive-brown packs. The measures are intended to create packs that have the lowest appeal to smokers. While we are not concerned about most of the measures being put into place by governments attempting to reduce smoking--including larger health warnings and in-store display bans--we think plain packs would cause significant trading down by smokers, a trend that would most affect British Ame rican Tobacco BTI and Philip Morris International PM but potentially benefit Imperial Tobacco ITYBY. We are maintaining our fair value estimates for the international manufacturers for the time being, and we shall monitor the progress of the bill through parliament. In any event, Australia represents a small portion of the global manufacturers' revenue, and we expect the bill's impact on valuations to be minimal. We do not believe plain packs will have a material impact on tota l industry volume, but we expect the legislation to cause large shifts in market share, driven by trading down. Smokers are likely to become less willing to pay a higher price for certain brands, and in turn, plain packs could erode the price premiums that high-end brands can currently realize. The legislation would hurt those firms with premium product portfolios the most, such as Philip Morris. While Marlboro is the jewel in Philip Morris' crown, its positioning at the top end of the pricing hierarchy could lead to material volume declines or large price cuts. The market leader in Australia is British American, with a 46% share, according to the company; we estimate that Australia represents a high-single-digit percentage of the company's total net revenue. However, British American's portfolio is quite well balanced among premium, midprice, and economy brands, so the impact to volume and pricing may be more muted than for Philip Morris. Imperial Tobacco has also expressed its opposition to plain packaging, but ironically, it could be one of the major beneficiaries of Canberra's proposed legislation. Imperial's superpremium brands form a small part of its portfolio (low double digits, by our estimation); most of the firm's volume is derived in discount categories--the very brands that could benefit from trading down. |
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HenryTo
Site Admin
Joined: 06 Aug 2004
Posts: 11743
Location: Los Angeles, California
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| Posted: Tue Jun 21, 2011 11:27 am Post subject: |
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Morningstar believes that the new FDA warning labels would have negligible impact on cigarette sales:
| Quote: | | The Food and Drug Administration, or FDA, is to introduce graphic health warnings on cigarette packs in the U.S. The pictorial and text warnings, which will take up 50% of the front and back of the packs, are designed to be disturbing. The pictures include a diseased lung and a man blowing smoke from a tracheotomy hole in his neck, while the text includes warnings such as "Smoking can kill you" and "Smoking can cause cancer." Evidence from other markets in which such measures have been introduced suggests that today's announcement will have limited impact on cigarette volumes in the U.S. We're maintaining our fair value estimates for the primary domestic cigarette manufacturers. We have analyzed the effect of numerous variables on cigarette demand, and we think pricing is the most effective tool for reducing consumption. We would be more concerned about large excise tax increases than we are about health warnings, particularly as the dangers of smoking were confirmed by th e surgeon general over 40 years ago. Nevertheless, the announcement is a reminder that regulators and public health officials are likely to clamp down further on the tobacco industry in the medium term. With most tobacco firms currently trading slightly above our fair value estimates, we think the market may be slightly underestimating the industry's risks. The dividend yield of around 6% on domestic players Altria MO and Reynolds RAI is still attractive in the current low interest rate environment, however, and we still believe there is around 10% upside to Lorillard LO. Plans to promote plain packaging in some international markets are of more concern to us, however. We think this could lead to trading down. However, we think legislation to introduce plain packaging could run aground on intellectual property grounds, and we do not expect such measures to be introduced in the U.S. However, the size of the health warnings to be placed on packs is material, and could have a similar impact on manufacturer's ability to display its proprietary packaging. However, with 50% of the packs still available for trademarks, we are not concerned about trading down as a result of these measures. |
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rffrydr
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Joined: 30 Oct 2005
Posts: 16939
Location: Sunny California
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| Posted: Tue May 26, 2009 12:19 pm Post subject: |
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Nothing "free" in that market for a long long time. A good example of an industry that "works" under the yoke of government control.
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