Star Scientific: 2012 Preview

With 2011 almost in the rearview mirror, many investors start to mull over their portfolios and ask what comes next. It's a fair question, and the answers we find are really the crux of great investing. The ability to identify value before the market has already baked expectations into the stock price is what distinguishes the successful investor.

With that, let's take a look at Star Scientific (Nasdaq: CIGX  ) . The company hangs its hat in the tobacco sector, brushing shoulders with the likes of Altria (NYSE: MO  ) , British American Tobacco (AMEX: BTI  ) , and Philip Morris (NYSE: PM  ) . But in reality, they are a much different kind of company. They specialize in smokeless tobacco products and utilize curing technology to substantially reduce much of tobacco's most negative health effects.

Stats for Star Scientific

Year-To-Date Stock Return

22.92%

Market Cap $312**
Price / Earnings Ratio NM
Estimated 5 Yr. Growth Rate NM
Dividend Yield None
CAPS Rating (out of 5) *

Source: S&P Capital IQ & Yahoo! Finance. NM = Not Meaningful.
**Value in Millions.

A look backward
Star Scientific has outpaced the Dow Jones (INDEX: ^DJI  ) by close to 16% for the year, yet the company continues to lose money. In the most recent quarter, their net income shrunk to a $6.6 million loss. In fact, the company has lost money every quarter since March, 2003. While regulations persisted throughout the year, providing a headwind for big tobacco, and a theoretical tail wind for Star Scientific, the company has failed to make a large dent in the smokeless tobacco space. They still trail smokeless tobacco sales by Reynolds American (NYSE: RAI  ) , which receives as much as 8% of their revenue from this division.

An eye on the future
Going forward for 2012 Star Scientific is unlikely to impress. They have shown themselves to be a constant money loser despite selling their signature Ariva line for over a decade. As a technological innovator, they are extremely reliant on one or two large break-through products, as opposed to big tobacco companies that depend on volume. While the potential payoff for this model is high, they have not shown an ability to effectively capitalize on that potential.

You may be wondering how a company that loses so much money continues to get cash to operate. Much to existing shareholders' chagrin, Star Scientific continues to issue more shares to fund operations. From 2008 to 2010, available shares jumped from 81 million to 127 million. This record of massive share-dilution is discouraging, and I expect investors will see more offerings in 2012 as Star burns through its cash balance.

What's even more ominous is that the company is largely dependent on favorable rulings regarding patent infringement litigation with RJ Reynolds Tobaccos. Not only does RJ Reynolds have the deep pockets of parent company Reynolds American to back them, but Star Scientific has, in their own words, "expended significant time and resources on our ongoing patent infringement litigation." An initially unfavorable ruling, followed by a small reversal, means no party can claim true legal victory yet. This is more bad news for Star, which has stated that, "Our future results will largely depend on the success of these initiatives." If the past is any indication, the legal chips are stacked against Star for 2012.

Summary
Between burning cash, unfavorable litigation, share dilution, and competition from deep-pocketed big tobacco firms, Star is a stock to avoid in 2012. Unlike most tobacco companies, Star doesn't pay a dividend (they can't afford to). Perhaps their gift to shareholders would be if they were bought out by another more major tobacco company.

Star Scientific's claim to be a technology company may be true, but they sure aren't a profitable one. If you're looking for a lead on a much better prospect, I invite you to read The Motley Fool's latest special free report that reveals: the only stock you need to profit from tech in 2012. The report is free, but it won't be there forever, so check it out today.       

Austin Smith owns no shares of the companies mentioned here. The Motley Fool owns shares of Altria Group and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2011, at 3:16 PM, VOR2012 wrote:

    Austin, nice gloss over but no mention of the Blockbuster potential of Anatabloc?? Investors are going to be looking at the performance of that, not the current balance sheet. JMO

  • Report this Comment On December 21, 2011, at 4:34 PM, philsdock wrote:

    The Fool needs to vet it's "journalists". Look closer at the last ruling from circuit court, it affirms Stars patents. Also as vor2012 points out no mention of CigRx or Anatabloc and the research behind it, Johns Hopkins, Pisa School of Medicine and Rosekamp along with the large institutional share holders in for the Long Run. Hope they don't pay you for this dribble and lack of effort. Or does someone else line your pockets?

  • Report this Comment On December 21, 2011, at 4:55 PM, osu78 wrote:

    Why is it the Fool authors always turn a blind eye to what is going on with Anatabine and it neutralcyclical Anatabloc? Could it be they are keeping this information all to themselves?

  • Report this Comment On December 21, 2011, at 7:48 PM, BostonBlackJack wrote:

    Sometimes when I read articles posted on "Motley Fool" I scratch my head in disbelief.

    Star Scientific has been less and less focused on tobacco for over a year - maybe more depending upon how you categorize their ongoing litigation battle with Reynolds American. The Star business model has been evolving.

    Just as RJR has an economic interest in Targacept, a biopharmaceutical company, Star Scientific has their wholly-owned subsidiary, Rock Creek Pharmaceuticals.

    The difference is that RJR's Targacept is shooting blanks while Rock Creek is generating a great deal of excitment.

    A small amount of due diligence would have helped the author of this piece quickly grasp Star's present business model.

    In any case, by late June or early September 2012 Reynolds will have exhausted their final legal delay and will face the future using a tobacco curing process covered by a valid patent owned by Star.

    Should Star sue over infringement for the most recent nine year period, RJR will again be in the hot seat.

    In the meantime, Rock Creek Pharmaceuticals is rocking with a new product known as Anatabloc, It was first made available to the general public on August 30th and is gaining solid traction in the marketplace.

    I look forward to the day when the Motley Fool re-visits the Star Scientific story after the early buzz on Anatabloc goes completely viral.

  • Report this Comment On December 21, 2011, at 9:55 PM, thefamilyman wrote:

    Really? I should think that even a "Fool" would require his authors to read the company's recent press releases before they write articles that purport to "Preview" the company's chances in the upcoming year. This article is a JOKE and in no way seriously analyzes the potential for this company.

    Austin Smith, you sir are incompetent; either that or a paid shill for RJR or Phillip Morris. You should be ashamed of yourself for such a ridiculous effort, or lack thereof...

  • Report this Comment On December 22, 2011, at 2:06 AM, factfinder101 wrote:

    UNBELIEVABLE! Two posts from The Fool on SS in one week, and no due diligence from either analyst/author.

    Because the rest of us know more about current developments and operations inside this company, one wonders about the credibility of ANY articles posted by these guys. Some analyst groups generate more respect than others, and The Fool is an outfit held in high regard by comparison. However, articles written and posted which exclude the most relevant facts about a company's progress and development certainly cast doubt regarding the publisher's reliability. SERIOUSLY!

    Are all the rest of us wrong about the ENORMOUS flood of revenues to be generated by Anatabloc and/or Cig/Rx in a worldwide market? Is it possible that a Sales/Marketing outfit the likes of inVentiv Health whose client list includes names like Johnson & Johnson, Abbott Labs, Pfizer and Merck will fall short of reaching the full market potential for these incredibly effective products? ...yeah... NO!!!

    I believe I can speak for the whole group here Fool... ANALYZE THIS!

  • Report this Comment On December 22, 2011, at 8:00 AM, TJWilsson wrote:

    C'mon commentors. Are you really surprised that an entity with a vested short interest would not mention anatabloc, and will understate the importance of the court ruling?

    A leak of anatablock information could cost millions of dollars to a highly leveraged short position.

  • Report this Comment On December 22, 2011, at 10:23 AM, Metaworld wrote:

    I too was scratching my head at the absence of the mention of Anatabine, especially since I have been seeing full page glossy ads (Boomer), and this week a radio commercial. Pharmacies are starting to carry Anatabloc in my city. Sure seems like it's gaining traction since being launched at the Governors Mansion on Aug 31. I'm sure you guys aren't recommending buying "Puts" on Star in your options group, right?

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