FOOL PLATE SPECIAL
Philip Morris Still Smokin'

Though much of the attention recently given Philip Morris has been focused on its Kraft food division as investors have turned to the consumer staple leader in tough economic times, the company is nevertheless taking the offensive in seeking out a beachhead for its tobacco business -- which accounted for a third of first-quarter revenue -- in the 21st century.

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By Dave Marino-Nachison (TMF Braden)
April 17, 2001

With many of the recent stories in Philip Morris' (NYSE: MO) news file centered around the company's plans for a multibillion-dollar IPO for its Kraft Foods subsidiary -- and the company's shares leaving the S&P 500 index gasping for breath over the last 12 months, investors might at times forget the $100 billion giant is also a tobacco company. But it is, and the company is actively looking to boost its position in that uncertain business. 

Today the company's financial results were on display, Philip Morris turning in first-quarter net income of $0.95 per share, up from $0.87 last year and a penny better than market estimates, as sales rose 12% year-over-year and increased cigarette prices helped overcome reduced global volume without sacrificing market share. Earnings took a nickel-per-share hit in connection with the company's Nabisco acquisition. (Tobacco accounted for about a third of quarterly sales and 26% of quarterly operating income.)

Growth numbers looked solid, too.

"We remain comfortable with our previously disclosed projections for full-year 2001 underlying earnings per share growth rates of 9%-11%," said Chairman and CEO Geoffrey Bible in a press release, "including the dilutive impact of the Nabisco acquisition, and 13%-15% on an underlying cash earnings per share basis, which excludes the impact of goodwill amortization." Outstanding risks, the CEO said, include foreign currency effects.

Investors got out of Philip Morris because of tobacco liability, then -- as Rick Aristotle Munarriz noted in a December column -- got back in when the shares became attractively depressed, taking second helpings when market sentiment turned away from technology stocks and back to more stable names and consumer staples. (For more on the consumer brands business, visit our InDepth page on the subject.)

With Philip Morris collecting billions of dollars of revenues from such household standbys as Kraft, Miller, and Nabisco -- the acquisition of which made Kraft the world's number-two food company after Nestle -- the company was a natural. Share buybacks and a cleverly boosted dividend made it even more attractive.

But the tobacco liability hasn't gone anywhere. In fact, it arguably worsened with the November news that a Federal judge decided not to hear the appeal of the case in which a Florida court stuck the company with more than $70 billion in damages. (The picture did, however, improve again earlier this month when a Florida jury said tobacco companies didn't have to pay a flight attendant damages in a secondhand smoke-related case. The industry paid $370 million to settle a related class action suit in 1997, but individual suits are ongoing.) Litigation news continues to roll in, bit by bit, from around the country.

Investors who've bought shares of Philip Morris have already decided they have no ethical problems with owning a tobacco company, so we won't discuss that here. But they've also either discounted or estimated satisfactorily the effect that unknowable future settlements and awards may have on the company's future cash flows, as well as future regulatory impacts on its tobacco business.

Potential regulation has been in the news today, as Philip Morris is apparently taking the offensive. As competitors like R.J. Reynolds (NYSE: RJR) attempt to recoup market share by launching new brands, the company is reportedly pushing for uniform national standards on cigarette marketing and ingredients from the FDA.

But while that may seem onerous on its face, it could help the company in at least two ways: First, it wouldn't have to contend with varied standards from state to state. And if the government was able to set a uniform standard for cigarette ingredients the company might be able to market a "reduced risk" product with what amounts to a federal seal of approval.

Anti-tobacco activists are predictably wary of the company's involvement in the regulation process, but investors should probably applaud the company's pro-active stance toward staking out a place for tobacco products in the 21st century.

Dave Marino-Nachison says little boys shouldn't smoke. His stock holdings can be viewed online, as can the Fool's disclosure policy.