|
Lawsuits and your stock
|
 |
December 3, 1998: 10:08 a.m. ET
Litigation can hammer a company's share price, but create opportunity
|
NEW YORK (CNNfn) - Philip Morris investors may have had a coughing fit when Big Tobacco agreed to pay $206 billion to settle a string of smoking-related lawsuits.
But the stock has risen five percent since the Nov. 16 agreement between the major cigarette makers and eight states. So the bad news has actually paid off.
"The settlement removes uncertainty," said Bonnie Zoller, a tobacco analyst at Credit Suisse First Boston.
While lawsuits are never welcome news, analysts said they don't always spell death for a company. And even if a lawsuit pushes a stock price down, it can create good buying opportunities for bargain hunters.
Lawsuits have had the most impact in tobacco, asbestos and breast implant cases, analysts said. Tobacco stocks have been flat over the last several years because of the looming litigation.
"Obviously, when a class-action suit gets going there's negative publicity," said Roy Burry, senior vice president at Brown Brothers Harriman. "But it's hard to generalize. If you've got an asbestos case or a breast implant case, you're looking at bankruptcy. But with tobacco, some suits are settled or thrown out."
Tobacco stocks started rallying in the last several months on rumors about a settlement, Zoller said. She put Philip Morris (MO) on a list of stocks that would outperform the market this summer when the shares were trading at 40. The stock closed at 53-5/16 the day the settlement was announced. In early trading Thursday, shares were down 7/16 at 56-5/16.
She had to weigh the possibility that the settlement could be good for tobacco companies -- and that the settlement could go sour.
"I felt the downside risk was limited," Zoller said.
Dow Corning Co., owned jointly by Dow Chemical Co. (DOW) and Corning Inc.(GLW), filed for bankruptcy in 1995 after thousands of women sued for damages for immune-system illnesses caused by leaky breast implants. Dow Corning on Nov. 9 finalized a $3.2 billion settlement for the cases.
"You could argue the Dow Corning litigation has had a significant impact on Dow Chemical," said analyst James Kelleher of Argus Research.
Then again, in the last 16 months, when most of the news about the breast implant settlement has unfolded, Dow Chemical's stock has performed its best, Kelleher said.
Of course, Dow Chemical benefits from $20 billion in revenues a year, Kelleher said. Smaller companies aren't so lucky.
"Any whiff of bad news can cause a thinly-traded stock to act more dramatically than it should," said Satya Pradhuman, director of small cap research at Merrill Lynch. "Ultimately, it matters. If a smaller company has to face legal issues, I've got to think it would cause concern."
The problem with a lawsuit in a small company is that it creates more uncertainty in an already cloudy future, Pradhuman said.
Whether a company is big or small, Pradhuman said it's important for an investor to look at the facts of each case individually.
"There's not one answer," Pradhuman said. "You have to look at each company separately." 
-- by staff writer Martine Costello
|
|
|
|
|
 |
|
