The tobacco industry is accused today of misleading smokers over the safety of additives in cigarettes.
Based on a new analysis of data used by the US cigarette manufacturer Philip Morris a decade ago, which found the additives were safe, University of California researchers claim the firm’s research “obscured findings of toxicity”. The original study by Philip Morris, called Project Mix, resulted in the publication of four papers in a scientific journal that concluded there was “no evidence of substantial toxicity” associated with the additives studied.

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More than 300 additives are used in the manufacture of cigarettes to enhance their taste and make smoking smoother and more enjoyable.

The new study, by the Centre for Tobacco Control Research at the University of California, was based on the same data extracted from among 60 million documents released after litigation.

The researchers claim the original studies “cannot be taken at face value” and failed to reveal additives’ dangers.

When they conducted their own analysis examining the additives per cigarette – as specified in the original protocol for the Project Mix study but later changed – they found the level of 15 carcinogenic chemicals increased by an average of 20 per cent.

They also discovered that, for what they call “unexplained reasons”, Philip Morris had de-emphasised 19 of the 51 chemicals tested in the presentation of their results, including nine that were substantially increased in the smoke on a per cigarette basis.

Stanton Glantz, who led the new research published in the online journal Public Library of Science Medicine, said tobacco firms had spent decades preparing for the implementation of tougher regulation of their products, including the regulation of additives.

The use of additives had worried the World Health Organisation, the US Food and Drug Administration and national regulatory bodies in the UK and around the world. Philip Morris had used the four papers published in Food and Chemical Toxicology in 2002 to defend their inclusion in cigarettes.

When millions of internal company documents from the tobacco industry were released it enabled Dr Glantz and colleagues to reanalyse the data.

He said: “Putting additives in cigarettes increases the amount of fine particles and this is a bad thing because it increases the inflammatory response.

“If you take [Philip Morris's] own data and interpret it correctly, you could use this data to ban these additives.”

A Philip Morris spokesman said: “We believe that the points raised in this recent paper by Stanton Glantz and others do not invalidate the findings of the Project Mix studies.

“All the Project Mix studies were reported alongside the actual data in four peer-reviewed scientific publications in 2002 and their way of calculation was discussed in one of the papers.

“The studies were performed according to well-established principles and standard toxicological guidelines.”

In the mix: Added chemicals

Additives are used in cigarettes to mitigate the harshness of tobacco smoke and make the experience of smoking more pleasant.

Sugar is often added in the form of glucose, honey and molasses. Flavourings and spices can be added for the same reason, including benzaldehyde, menthol and vanillin or cinnamon, ginger and mint. Others used are orange oil or licorice extract. The most common are menthol, cocoa and glycerol.

Other unusual substances, not mentioned in this particular study but often added to cigarettes, include vinegar and pimenta leaf oil, which is used in non-alcoholic beverages and ice cream.

The Australian government has pushed through the world’s first plain packaging anti-smoking laws but will have to defend them in both foreign and local legal arenas. In the same day the laws were passed, cigarette maker Philip Morris announced it had launched legal action against the Australian government. The tobacco giant’s Hong Kong office says the law breaks a trade deal between the Chinese territory and Australia.

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The laws mean from December 2012, cigarettes will be sold in plain olive wrappers dominated by big graphic health warnings.
ROTHWELL: Philip Morris has been referring to this possible legal avenue now for about four or five months. Previously the difficulty was that there was in my view no real legal case because the legislation hadn’t been enacted. But as you’ve just noted, the legislation has now passed through parliament and it now appears clear that Philip Morris has sought to argue that under the bilateral investment treaty between Hong Kong and Australia that there is taking place with this legislation an unlawful expropriation of Philip Morris’s investment into the Australian market as a result of the barring of Philip Morris being able to use its brand and product details on the packaging of its tobacco products.

LAM: And where will the legal action take place? In both Hong Kong and here in Australia?

ROTHWELL: Well there is a 90 day cooling off period that’s required under the bilateral investment treaty, which basically gives both sides the opportunity to try to resolve or settle their dispute. However if that proves to be unsuccessful then the matter would most likely be sent to the International Centre for Settlement of Investment Disputes in Washington.

LAM: Well Philip Morris also said that it served a notice of arbitration with the UN Commission on International Trade law. What does this mean?

ROTHWELL: Well I think this just highlights that Philip Morris is pursuing multiple different legal avenues. So they’re also looking at this being a measure which is inconsistent with international trade law under the World Trade Organisation. They’ve also highlighted the potential for exploring options under what’s called the TRIPS Agreement, which is the trade related agreement on aspects of intellectual property rights. So Philip Morris at the moment is undertaking apparently a multi-pronged approach to address these issues both in international forums, plus as you’ve identified also possibly before the High Court of Australia.

LAM: So essentially what is Philip Morris looking for? What is it seeking?

ROTHWELL: Well ultimately one would think that they’re seeking to have the Australian government back down and reverse this law, which doesn’t take effect until December 2012. The alternative to that would be very significant amounts of compensation, and there are press reports that today in Australia of course indicating that Philip Morris would be seeking billions of dollars. Now they haven’t quantified that precisely, but ultimately they’re saying that the acquisition of the intellectual property that’s commonly associated with their trade marks and their product packaging would in their view cost them very significant amounts in terms of their income generated from sales.

LAM: Australia’s Health Minister Nicola Roxon has criticised Philip Morris for what she calls its addiction to legal action, and the federal government said that it had good legal advice before it pushed the laws through. Do you agree with that assessment that the Australian government will successfully defend this case?

ROTHWELL: Look there are strengths and weaknesses for both sides of the argument. The key questions being whether what Australia is doing is seeking to acquire property by the imposition of these rules, and if so what are the consequences that flow on from that legally. On the other side of the case, Australia would no doubt argue that these are legitimate public health measures which are being applied on a non-discriminatory basis to all tobacco retailers in Australia. So it will ultimately come down to those pivotal legal questions, and to that end it’ll be quite an interesting area of law to investigate because of the growing recognition of the legitimacy of public health measures of this type.

LAM: And just briefly Don Rothwell, are we looking at a long drawn battle here, or is there a timeframe for this legal case?

ROTHWELL: Well if the matter is to go to the High Court of Australia it would probably take up to a year to probably work its way through the courts there. International litigation would also possibly take the same period of time. So we may well be looking well into 2012 before we see a final resolution.

Below is our third-quarter sector outlook for the tobacco industry. While we do not expect any major surprises in the quarter, there are a few factors at play that could move the stocks. We note the following: Tobacco stocks have continued to outperform the market, which has pushed valuations toward the high-end of the historical range. Philip Morris International’s (ticker: PM) Marlboro Leadership Program has now been in place for another quarter and any impact on share should be more evident.

* The second-quarter wholesale trade inventory build should have reversed in the third quarter and resulted in reduced volumes for the industry.

* The macroenvironment remains soft in the U.S. and abroad, potentially shifting consumption trends.

* The U.S. dollar has strengthened, resulting in a diminishing translation tailwind for international markets at Philip Morris.

We estimate industry shipment volume was down approximately 4.5% (excluding trade inventory deloading) during the third quarter. We expect underlying cigarette-industry volumes will decline slightly more than the recent historical trend of around a 4.0% decline.

We estimate that Lorillard’s (LO) shipment volumes should be up low single digits for the quarter, while we think volumes at Reynolds American (RAI) and Philip Morris were down low mid-single digits.

Second-quarter cigarette volumes, particularly at Philip Morris and Lorillard, benefitted from a wholesale trade inventory build in anticipation of price increases that were implemented in early July 2011.

Theoretically, the second-quarter inventory build should translate to lower third-quarter cigarette volume, as the excess inventory works through the channel.

Our $1.24 earnings per share estimate for Philip Morris is in line with the consensus estimate. For the third quarter we are estimating low double-digit top-line growth driven by a decline in cigarette volume of around 1% and a high single-digit price/mix/currency benefit.

We expect Philip Morris’ operating income to increase 12% excluding foreign exchange and are forecasting about 210 basis points margin expansion (up about 70 basis points year-over-year excluding acquisitions and currency), taking the company’s adjusted operating company income (OCI) margin to about 46% (about 44% excluding acquisitions and foreign exchange).

We believe the risk-to-reward ratio to owning Philip Morris heading into earnings is positive given the market’s overreaction to currency headwinds. Consequently, we think Philip Morris shares could be poised for significant appreciation if Philip Morris reports positive fundamentals.

For Altria Group (MO) our EPS estimate of 57 cents, which represents 6.8% growth, is slightly above the consensus estimate of 56 cents. We are estimating very modest revenue growth, driven by cigarette volume declines of around 4% year-over-year. We expect Altria Group’s operating margin will expand slightly to 43%.

At Lorillard, our EPS estimate of $2.00 represents 10.3% growth and is slightly below the consensus estimate of $2.03. We are estimating net sales growth of about 5% year-over-year about , driven by volume growth in the low-to-mid-single-digit range.

However, we expect Lorillard’s operating margins to deteriorate slightly to about 42% during the third quarter.

For Reynolds, our EPS estimate of 74 cents represents 10.8% growth and is above the consensus estimate of 73 cents. We estimate net sales will increase 4.7% and expect volume to decline around 2.0%. We expect Reynolds’ operating margin will expand 100 basis points to 31.4%.

A lawsuit that resulted in a $10.1 billion judgment against cigarette maker Philip Morris apparently is headed back to the Madison County circuit court. In a one-sentence ruling, the high court declined to hear the company’s appeal of a lower-court ruling that revived the litigation earlier this year. In 2003, then-Circuit Judge Nicholas Byron awarded plaintiffs $10.1 billion in compensatory and punitive damages after a two-month trial of a class-action lawsuit, Price v. Phillip Morris.

The plaintiffs, represented by St. Louis lawyer Stephen Tillery, contended that Philip Morris (now Altria Group Inc.) deceived consumers when it advertised that certain of its cigarettes were “light” and contained “lowered tar and nicotine.” They said the company knew that Marlboro Lights were not safer than non-light cigarettes and might even be more dangerous to health.
The case appeared dead after the Illinois Supreme Court reversed the trial court ruling in 2005, finding that the company’s use of the terms “lights” and “lowered tar and nicotine” were specifically authorized by the Federal Trade Commission but the U.S. Supreme Court, in a 2008 decision, found that the FTC did not authorize use of those terms.
Tillery’s petition to reinstate the case in the circuit court — on the basis of “new facts” established in the U.S. Supreme Court case — was denied in December but the denial was reversed by the 5th District Appellate Court in Mount Vernon in February and the state Supreme Court on Wednesday declined to hear the company’s appeal of that decision.

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. Its portfolio of international and local brands includes Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. Philip Morris was a spin-off from Altria (MO). Philip Morris is its international brand and only operates outside of the United States. This is one of the reasons why I like Philip Morris more than other tobacco companies.

As you can see Philip Morris has large market share in Asia, although it’s not the biggest it still is a major player. A major concern for many here is that it has large market share in Europe, a region dealing with a major credit crisis. I do not think this is a major issue though. both because of cultural reasons and regional reasons. Europeans are not likely to stop smoking anytime soon even amidst a credit crisis. Cigarettes are part of their everyday lives and are looked at as a necessity. The stronger European nations such as France, Germany, Belgium, and Netherlands, are the heaviest smokers, not the debt-laden countries such as Greece. Also keep in mind England accounts for the largest chunk of the market and is not even part of the EU.

The reason I do not want exposure to the U.S. tobacco market is not because of the flat sales growth, but rather the massive government regulation taking place.

Altria Group Inc. (MO) unit Philip Morris USA said it is suing 34 New York City retailers for allegedly hawking fake Marlboro cigarettes, a major source of lost revenue for the company. The largest U.S. cigarette manufacturer by revenue has waged a long-running campaign against sellers of the allegedly counterfeit cigarettes from California and Florida to websites based in China. The two lawsuits brought Wednesday bring the total number of New York retailers sued by Philip Morris USA to 212.

The tobacco giant said there could be more than three million packs of counterfeit Marlboro cigarettes available in the New York City area each year. The city has the highest cigarette-tax rate in the country, which makes trading in illicit cigarettes very profitable.

Tobacco companies say the counterfeiting of cigarettes, often connected with organized crime syndicates, is so widespread around the world that it costs the industry billions of dollars in lost sales each year.

Altria shares were recently up 1% to $26.86 Wednesday. The stock is up 31% over the past 12 months.

Tobacco company Philip Morris (PM), which sells Marlboro, L&M, Parliament and other well-known brands around the globe, is pouring money into a new aerosol-based delivery technology it says will make smoking less unhealthy. On May 26, it said it purchased the global rights to market a technology that avoids burning tobacco or wrapping paper. Jed Rose, an inventor of the new technology, said in a Morris news release that the company will offer over time an alternative to traditional cigarettes, “thereby reducing smokers’ exposure to carcinogens and other harmful smoke constituents.”

Morris is reacting to the growing number of smokers who use a so-called “electronic cigarette” that injects nicotine in a mistlike form into the user’s mouth and lungs.

Morris boasts an 83 Earnings Per Share Rating, second highest within the nine-company tobacco industry group. The rating takes into account both earnings growth over the past three to five years as well as in recent quarters.

In both measures, Morris has delivered steady expansion. Over the past seven years, earnings declined just twice annually — down 4% in 2007 and off 3% in 2009.

Earnings rose 17% in 2010 to $3.87 and are seen jumping 19% to $4.59 this year, according to Thomson Reuters.

On a quarterly basis, EPS have grown 8% to 22% from year-ago levels over the past six periods. The average increase was 17%. Sales lifted 2% to 17% over the same six-quarter time frame.

Asia is a big driver of revenue growth, as cigarette shipments in Q1 jumped 14% thanks in large part to demand in Indonesia and what Morris calls a “favorable impact” of its merger and acquisition activity in the Philippines.

On April 11, the company paid a quarterly dividend of 64 cents a share to shareholders on record as of March 24. Annualized, the payout gives the stock a yield of 3.7%.

Morris bought back 22.2 million common shares in Q1 for $1.36 billion. It has 1.78 billion shares outstanding.

In the week ended Feb. 18, Morris cleared a base with a 60.24 buy point.

Today the company is called Altria Group Inc., but since the beginning of the 20th century, it was always known as Phillip Morris. Originally incorporated in 1902, what began as a small New York City tobacco company grew into the great American corporation that stood behind the country’s premium brand of cigarettes: Marlboro. Oscar Mayer, Philadelphia, Oreo and Maxwell House are just some of the other familiar products in its brand portfolio, although it will probably remain best known for the enduring image of the Marlboro Man.

Starring in decades worth of advertisements, the Marlboro Man was practically an entity who embodied freedom, independence and the American spirit of wanderlust. He conjured up images of a “road less traveled” in the imagination of people who smoked his cigarettes, and he helped make Phillip Morris the powerhouse it is today.

For that same reason, Altria now wants little to do with the former American icon. They see the Marlboro Man for the image that he has come to embody today. No longer does he roam freely amid the plains and mountains of the American Midwest. He has become a target, and he is hunted day and night.

Gone are the open campfires in the company of wild mustangs and bison. He is a wanted man, for whom the reward money is greater than that of any other outlaw in American history. Few judges, magistrates and attorney generals look favorably on the crimes he stands both accused and convicted of, and the stiff verdicts they’ve handed down have proven that repeatedly. For the Marlboro Man is, after all, a convicted killer. He has been found liable in the suffering and misfortune of a great many current and former smokers, and the death toll that’s been placed at his feet is heavy.

The allegations, however, go far beyond numbers, as the tobacco lawsuits that have besieged Phillip Morris are filled with details of the lone cowboy’s duplicitous behavior. They contend he intentionally deceived people into buying into a fool’s gold fantasy, luring in impressionable and unsuspecting youth with empty promises of a free and independent life, while quietly laughing all the way to the bank. Although many of these lawsuits culminated in the landmark 1998 Tobacco Settlement, legal proceedings against the cigarette giant have by no means abated. Court battles persist around the country, with multi-billion dollar jury awards being given to plaintiffs with increasing frequency. In the eyes of his accusers, as well as many activist groups and anti-smoking coalitions, the Marlboro Man is little more than a con man, if not an outright predator.

Notwithstanding the infamy, he can still muster his share of supporters. Yup, some believe that everyone knew the dangers associated with smoking and that the road less traveled could be fraught with peril. Considering that almost 1 out of every 4 adults in this country smokes, and that Phillip Morris USA maintains a market share dominance of 50 percent, it still has plenty of loyal patrons to whom the red and white pack represents far more than all the taxes and fines levied against it.

So today the company is called Altria, and it’s easy to understand why. For Phillip Morris, the writing on the wall was becoming too clear. They had little choice but to dissociate themselves with the Marlboro man, as the tarnish of the tobacco lawsuits and massive losses associated with them tell most of that story. In the various trading pits that comprise Wall Street, the concern today extends far beyond the Marlboro Man.

Uncertainty lingers over the extent of the liabilities and whether the company can ultimately sustain them. With the storied history of Phillip Morris inseparably linked to the Marlboro Man, and the future of Altria contingent on a new identity without him, it remains to be seen what eventually becomes of the legendary cowboy.

Philip Morris International (PM) has the world’s leading seller of cigarettes outside of the U.S. with 15.6% of market share. Since the 2008 split with Altria (MO), Philip Morris no longer needs to compensate for the declining popularity of smoking in America. Along with sound financials, Philip Morris International has excellent growth prospects in Europe, Latin America, and Southeast Asia where the population have gotten hooked on cigarettes.

The fundamental strength of Phillip Morris is its dominant position international smoking friendly markets. Excluding China which is dominated by a state owned tobacco company, Phllip Morris controls 27% of the world market. Without exposure to the U.S. markets, litigation risk is significantly lower than Altria and domestic cigarette companies. However, on the other hand, regulations in European markets have kept high barriers to entry against competition. Restrictions on advertising are believed to be a problem, but this simply reduces marketing costs and prevent competitors from making a name for themselves. In addition, cigarettes are a defensive play as a bad economy as quitting smoking does not have a proven correlation with losses of income.

Even with the recent run up of its stock price to near $70 per share, the stock is still not overvalued. With a forward P/E ratio 13.96 and a PEG of 1.83 the stock is not dirt cheap, but still not overpriced. The dividend yield is also high at 3.93% and solid of profit margins of 11.26%. However, the financial indicator that stands out is its 26% return on investment capital that highlights the company’s efficiency. However, PM’s high debt/equity ratio of 3 may hint at a sharp pullback if the stock price turns around. Overall, with dominant market position and strong financial growth, I recommend buying the stock and expect the stock to rise to about $80 plus profits from dividend payouts.