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.

Philip Morris USA said a federal appeals court denied review of a trial judge’s decision last year denying class-certification in four separate cases in which smokers sought refunds for “lights” cigarettes they smoked. The Altria Group Inc. (MO) unit said the First U.S. Circuit Court of Appeals declined to review a district judge’s Nov. 24 decision related to four cases that were selected as sample cases for a larger group of pending cases across the U.S.

Murray Garnick, an associate general counsel for Altria, said it was “simply is not possible to resolve these claims without determining why an individual smoker decided to purchase ‘Light’ cigarettes.”

Garnick added, “There are numerous individual issues that render a class action unsuitable for resolving this type of case.”

Under the cases in question, the smokers alleged the tobacco company was deceptive in its advertising for light and low-tar cigarettes. They argued Philip Morris used those descriptors to suggest the brands were less harmful than regular cigarettes, even though it knew users would be getting the same level of tar or nicotine from them.

BIG tobacco is hoping a new multilateral free trade agreement will enable it to sue the Federal Government if Australia introduces plain packaging for cigarettes in mid-2012 as planned. Philip Morris wants a clause added to the Trans-Pacific Partnership Agreement (TPPA), currently being negotiated, which would allow the company to sue the commonwealth for damages internationally.

Health experts are calling on the Gillard Government to fight back by insisting on a counter-clause to make clear the regional agreement couldn’t restrict efforts “to prevent or reduce tobacco use”.

Associate Professor Thomas Faunce says Philip Morris has lobbied the United States Trade Representative regarding the TPPA.

In its submission the tobacco company argues plain packaging amounts to the theft of intellectual property.

Philip Morris also states plain packs, devoid of brand logos, images and colours, would limit “commercial free speech” and restrict competition.
It wants an investor-state dispute settlement provision inserted in the trade agreement that would allow it to sue governments that introduced legislation impeding foreign investment.

“Such provisions grant investors covered by them a right to initiate dispute-settlement proceedings for damages in international arbitration proceedings against foreign governments…without having to first seek damages in domestic courts,” Professor Faunce writes in the latest issue of the Medical Journal of Australia.

“The lawyers controlling such arbitral proceedings are appointed and paid at the behest of the parties and do not necessarily take account of domestic public health and environment protections.”

Professor Faunce, from the Australian National University, expects final negotiations on the TPPA to conclude this year with the agreement to enter into force in 2012.

“It’s very rare that you see a trade deal that’s substantially negotiated stop,” he told AAP.

“But there’s a strong chance we may be able to remove the investor-state clause component or significantly alter its application to Australia.”

Such a provision was expressly excluded from the 2005 bilateral Australia-US Free Trade Agreement.

But Professor Faunce says even if an investor-state clause finds its way into the final TPPA, the Federal Government can protect itself by passing domestic legislation.

“Parties may initiate interpretive declarations restricting the applicability of any investor-state dispute settlement provision … to their public health policies, legislation and regulations,” he writes in the MJA with co-author Ruth Townsend.

Australia could also argue for a clause to be inserted in the agreement stipulating “a non-discriminatory regulation for public health that affects foreign investment is not deemed expropriatory and compensable for damages”.

The journal article notes that last year then trade minister Simon Crean said Australia had “serious reservations about the inclusion of investor-state dispute settlement provision in this agreement”.

“We do not want new layers of red tape under the guise of trade liberalisation,” Mr Crean said.

Labor announced in April last year that cigarettes will have to be sold in plain packets from mid-2012.

If the move is successful it will be a world first.

The Government expects the change to make smoking less appealing to young people who may be susceptible to the lure of branding and packaging.

A Minnesota court has reinstated a nearly decade-old class action suit claiming that the manufacturer of Marlboro Lights misled consumers by claiming that light cigarettes were healthier than the standard variety. The ruling by the Minnesota Court of Appeals reverses a 2004 decision from the district court denying class certification for the suit against Philip Morris. In that decision, the court said that it would be necessary to determine why each class member smoked light rather than standard cigarettes, making the case inappropriate for class treatment.

But the appeals court disagreed, ruling that, since the central issue in the case is false advertising, the class members’ individual reasons for smoking light cigarettes are largely irrelevant.
“As we understand it, appellants’ theory of damages is that, no matter what individual factors may have been involved in a class member’s decision to purchase Lights, all consumers of Lights were led by false advertising to believe that Lights were healthier than regular cigarettes when they were not,” the judges wrote in their 45-page opinion.

Ruling could lead to more litigation
An attorney for the plaintiffs said class certification is crucial to the case’s survival.

“An individual consumer cannot take on, alone, a Philip Morris,” attorney Kay Nord Hunt told the Minneapolis Star Tribune. “So I think it’s very important to the Minnesota consumers … that they can proceed as a class.”
The court’s theory — that a case centered around false advertising does not require an investigation of each consumer’s decision to buy light cigarettes — could open the door to similar cases, if it holds. Perhaps for that reason, Murray Garnick, a spokesman for Philip Morris parent company Altria, was adamant that the ruling was wrong on the merits and contrary to precedent.

“We believe it is inappropriate to give class-action status to smokers’ claims because they raise numerous individual issues that can only be resolved based on the factual circumstances of each individual smoker,” Garnick told the Star Tribune. “Today’s ruling is contrary to every federal court decision on whether cases such as these should be certified [as a class action] and the overwhelming majority of state court decisions on the issue.”

Philip Morris said it is considering its options for an appeal.

False beliefs about “light cigarettes” continue to hold
The case highlights the misleading nature of so-called “Light” cigarettes. A recent survey found that 44 percent of smokers smoked “light” or “ultra-light” cigarettes, with one quarter of them saying they did so because they believed “light” cigarettes are less harmful and/or easier to quit than regular cigarettes.

New federal regulations, which took effect in July, prohibit manufacturers from using labels like “light,” “mild,” or “low.” Because of that law, “Marlboro Lights” are now branded as “Marlboro Gold.”

A lawsuit that alleges the maker of Marlboro Lights used deceptive trade practices and false advertising when it marketed its cigarettes as “light” can proceed in Minnesota as a class-action claim, the state Court of Appeals ruled Tuesday. The 45-page ruling by the three-judge panel sends the 2001 lawsuit against Philip Morris back to Hennepin County District Court.

The class would include people who bought Marlboro Lights in Minnesota for their personal use from 1972 through November 2004. The number of people in the class and the amount of damages they would seek was not immediately available Tuesday. The plaintiffs are seeking refunds of money they spent on the cigarettes.

In a statement, Philip Morris said it was considering its options for an appeal. The company said it believes class-action status is inappropriate because the circumstances of each smoker are different.

The district court denied the request for class certification in 2004, saying it was necessary to look at each person’s reasons for smoking light cigarettes and the manner in which they smoked them. But later that year, the district court reversed itself and certified the class, saying that because the injury being claimed was economic, not physical, all class members suffered similar injury.

The appeals court judges agreed with the class certification.

“As we understand it, appellants’ theory of damages is that, no matter what individual factors may have been involved in a class member’s decision to purchase Lights, all consumers of Lights were led by false advertising to believe that Lights were healthier than regular cigarettes when they were not,” the judges wrote.

Courts around the country have been split on whether similar cases can proceed as class-action claims.

The Tobacco Products Liability Project, which is based at Northeastern University School of Law in Boston and advocates for litigation against the tobacco industry as a way of improving public health, said class certification has been granted in state courts in Missouri, Massachusetts and New Hampshire.

But in New York in 2008, an appeals court ruled against class certification. And last month, a federal court in Maine concluded that class certification was inappropriate in cases pending in Illinois, California, Washington, D.C., and Maine.

Tuesday’s opinion dealt with several other issues in the case as well.

Among them, the appeals court judges said Minnesota’s $6.1 billion settlement with the tobacco industry in 1998 does not bar this lawsuit from going forward.

In 2009, Congress passed a law banning the marketing of tobacco products with words such as “light” or “low-tar.” This year, Philip Morris changed the name of Marlboro Lights to Marlboro Gold Pack.

We have closely followed the recent outbreak of Florida suits claiming injuries from smoking, but today we turn our attention to tobacco-litigation news coming out of the Land of 10,000 Lakes. The Minnesota Court of Appeals yesterday gave a green light to a suit claiming that Philip Morris misled smokers by marketing low-tar cigarettes as a healthier form of tobacco.

The court also authorized the suit to proceed as a class action, on behalf of people who purchased Marlboro Lights in Minnesota for personal consumption from 1972 to 2004. (Click here to read the ruling, which reversed a lower court’s partial dismissal of the case.)

Here’s an article from the Minneapolis Star Tribune about the appellate court’s decision and here’s a piece from the St. Paul Pioneer Press. (Hat tip: How Appealing.)

“An individual consumer cannot take on, alone, a Philip Morris,” Kay Nord Hunt, one of the plaintiffs’ lawyers in the case, told the Star Tribune. “So I think it’s very important to the Minnesota consumers … that they can proceed as a class.”

The appellate court’s ruling could also make it easier for Minnesota plaintiffs to bring consumer-fraud and deceptive trade practices claims of all sorts, the Star Tribune reports, noting that the court took a relatively broad view of the types of plaintiffs’ who qualify to bring such claims.

Philip Morris said it was considering an appeal.

“We believe it is inappropriate to give class-action status to smokers’ claims because they raise numerous individual issues that can only be resolved based on the factual circumstances of each individual smoker,” said Murray Garnick, an associate general counsel for Altria, the parent of Philip Morris. “Today’s ruling is contrary to every federal court decision on whether cases such as these should be certified [as a class action] and the overwhelming majority of state court decisions on the issue,” he told the Star Tribune.

For nearly a decade, Altria Group and Philip Morris USA actively supported federal regulation of tobacco products. Philip Morris USA agrees with the overwhelming medical and scientific consensus that cigarette smoking causes lung cancer, heart disease, emphysema and other serious diseases in smokers.
OUR VIEW: Nation must do more to keep kids out of smoking pipeline.

We cannot ignore the health issues associated with tobacco use and its implications for consumers and society as a whole. At the same time, as Congress confirmed by passing legislation that gave the Food and Drug Administration (FDA) regulatory authority over tobacco products, society has decided to continue to permit the sale of these products to adults and to leave decisions about their use to those adults.

Much of the recent Surgeon General’s report presents information that has been common knowledge for many years. There is no safe cigarette, and nothing about the design of our cigarettes or the packaging is meant to convey that one cigarette is safe or safer than another. If smokers are concerned about the health risks of cigarette smoking, the best thing to do is quit.

The company supports a variety of efforts to communicate the health risks of tobacco use, prevent underage use and connect smokers who wish to quit with expert cessation information. As an example, since 2004, Philip Morris USA has placed information about the QuitAssist resource on more than 1 billion cigarette packs in the United States via miniature brochures.

Tobacco products and tobacco companies have been a source of considerable conflict and controversy over the years. We believe that FDA regulation, thoughtfully implemented, can contribute to resolving many of the issues that concern the public, our consumers, the public health community, and our tobacco companies, including a framework for guidance on harm-reduction efforts.

In addition, we hope that, as the FDA continues to implement federal regulation of tobacco products, all stakeholders on this issue can move beyond these conflicts to a regulatory system that offers real and practical solutions.

As you can see, all of these stocks have handily outperformed the S&P 500 Index over the past three months, and only Imperial Tobacco and Lorillard failed to best the broad market measure over the past year. Now, one might be tempted to think that due to the ever-increasing social stigma, along with the growing number of public smoking restrictions, cigarette sales would be in the ash tray. One might also be tempted to conclude that earnings from tobacco companies are going up in smoke. If you think that, then you’d be wrong on both counts.

The fact is that despite the aforementioned negatives facing the industry, as well as the omnipresence of current lawsuits and the threat of near-certain future lawsuits, tobacco companies actually are doing very well.

On Oct. 21, industry giant Philip Morris reported that third-quarter earnings rose 8% from a year earlier to $1 a share. The latest quarterly earnings figures represent the fourth-consecutive quarter of earnings gains for the tobacco giant. Philip Morris also raised its full-year EPS guidance to $3.90-$3.95, and boosted its dividend 10% to an annualized $2.56 a share (a yield of 4.3%).

Philip Morris’ parent company, Altria Group, reported a 28.2% increase in Q3 earnings to an impressive $1.13 billion, or 54 cents per share, well above the 52 cents per share consensus estimate. Altria also raised its 2010 full-year guidance from a range of $1.81 to $1.85 a share to a range of $1.83 to $1.87, reflecting tax benefits. On an adjusted basis, the company reaffirmed its guidance.

The story is much the same for Lorillard. The No. 3 U.S. tobacco company reported a year-over-year net earnings increase of 16.6%, to $274 million, or $1.81 a share.

Lorillard said that during the quarter, domestic wholesale shipments increased 5.8% vs. the same period last year.

Earnings in tobacco-land are strong, and that’s a big reason why investors keep lighting up the sector. Add to the fact that most of these stocks pay solid dividends and offer attractive yields, and you get an industry delivering the nicotine investors really crave — big price performance.

With Valentino Rossi out until mid-August at the earliest, his Fiat Yamaha team-mate Jorge Lorenzo has quietly moved to the top of the Moto GP ladder, taking his fourth win out of six races at the classic Assen track in the Netherlands last weekend. Lorenzo was fastest in every session, took pole, got hounded for a bit by Repsol Honda’s Dani Pedrosa and a resurgent Casey Stoner on the Marlboro Ducati, but then as his harder rear tire came in he simply motored off into the distance. Stoner pounded on Pedrosa for a while but couldn’t get past, finally fading back to finish third, his first podium of the year.

Stoner and Pedrosa both benefited from great starts, while Ben Spies on his Tech 3 Yamaha also got a superb jump, quickly moving into second behind Lorenzo and holding up Pedrosa and Stoner for several laps. He eventually finished an excellent fourth, proving that his podium third place in the U.K. the previous weekend was no fluke.

With a 47-point series lead at the one-third point in the series, Lorenzo is looking strong for the 2010 title, particularly with Rossi out of the picture indefinitely and nobody else able to consistently match his pace.

A dark horse for “most improved rider of the year” has to be Randy de Puniet, on the LCR Honda team, the smallest and most cash-strapped team on the circuit. De Puniet was near the top of the time sheets both at Silverstone and here at Assen, and had a wrestling-match style battle with Repsol Honda’s Andrea Dovizioso in the last few laps for sixth. Despite obvious traction problems from badly worn tires, de Puniet passed the factory bike several times, and only just missed out on fifth in the last corner, to his obvious fury and frustration.

Nicky Hayden, on the second Ducati, had his worst outing of the year, finishing seventh. He had an okay start but got blocked in the first turn and lost a lot of time both there and getting past the blockers, and by then he could do nothing about the leaders despite running at nearly their pace.

Silly season has started early this year, with chit-chat and rumours about 2011 taking more blog and magazine space than the actual racing. All four of the “aliens” — Rossi, Lorenzo, Pedrosa, and Stoner — have contracts ending this year, as in fact do many of the other riders. That makes the game of musical chairs even more active than it usually is.

The latest rumour is that Stoner has decided to leave Ducati for Honda, who are desperate for somebody who can win consistently (Pedrosa and Dovizioso just haven’t delivered the goods). Honda sponsor Repsol insists on a Spanish rider, so Pedrosa’s seat is probably safe, except that Ducati has been chasing him.

Over at Yamaha, Rossi has been asked to take a big salary cut of several million euros as part of an austerity budget. He was apparently willing to consider it until he found out that his cut would go to double Lorenzo’s salary; now he’s not a happy camper. Back in Italy, Philip Morris (Marlboro cigarettes, Ducati’s main sponsor) would kill to get Rossi on a Ducati, and have reportedly offered him 15 million Euros to join the squad. If Rossi does that, suddenly Pedrosa is more or less stuck with Honda, unless he moves to Yamaha. But since he and Lorenzo don’t get along …

From cmgonline.com, by Larry Tate, June 29, 2010