Tobacco stocks up in smoke
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March 31, 1999: 1:37 p.m. ET
Record $81M Oregon verdict wallops Philip Morris, others, as new suits lurk
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NEW YORK (CNNfn) - Tobacco company shares sank Wednesday, a day after an Oregon jury slapped industry titan Philip Morris Cos. with $80 million in damages in a suit over the death of a former smoker.
The prospect that other such punitive awards could befall the industry, such as upcoming jury decisions in Tennessee and Florida, caused investors to flee the stocks Wednesday, an analyst said.
Shares of Dow Jones industrials average component Philip Morris (MO) tumbled 3-1/4 to 34-1/12, or 8.6 percent, weighing heavily on the index. The shares tumbled 8.3 percent Tuesday.
Tuesday's verdict came in a case brought by the family of longtime Marlboro smoker Jesse Williams, who died of lung cancer in 1997. The record award included $800,000 in compensatory damages and $79.5 million in punitive damages.
Following the verdict, Morgan Stanley Dean Witter cut its rating on Philip Morris to "neutral" from "strong buy."
The staggering award comes just weeks after a California jury dealt a similar blow to the company, awarding $51.5 million to 53-year-old Patricia Henley, also a longtime Marlboro smoker, who has been diagnosed with terminal lung cancer.
Gary Black, an analyst with Sanford C. Bernstein, said investors were lulled into a false sense of security about tobacco stocks after a landmark $206 billion settlement of state lawsuits last November and a recent victory for the industry in an Ohio case brought by a labor union.
"The problem is that people have been terribly naive. They thought the deal [with the states] would led to litigation closure," he said. "People are realizing that the tide has turned, and that you have to price in the litigation risk."
On the docket before tobacco companies are the so-called Karney case in Memphis, Tenn., and the Engel case in Florida, Black said.
"While labor cases have been slammed shut, we are now back to what has always plagued the stocks, and that's the individual claims," he added.
Black said he expects tobacco shares to move "sideways to down" in the near term, "until the bleeding has stopped, but we are not ready to make that call yet."
Among the other companies taking it on the chin was the nation's No. 2 tobacco giant RJR Nabisco (RN), which is in a squabble with Philip Morris. Its shares fell 1-9/16 to 26-3/16.
About three weeks ago, RJR Nabisco announced the sale of its global tobacco operations to Japan Tobacco Inc. for $8 billion and plans to spin off its food products unit.
Elsewhere, U.S.T. (UST) dipped 3/16 to 26-1/2, Loews (LTR) dropped 2-3/8 to 76-3/16, and the American depositary receipts of Britain's B.A.T. Industries (BTI) shed 7/8 to 17-3/16.
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