NEW YORK (CNNfn) - The verdict is in. The world's biggest tobacco companies are ordered to give ailing smokers a whopping $145 billion in penalties in the Florida lawsuit that has dragged on for the last two years.|
That amount, one of the largest awards to plaintiffs in a class action suit, is more than enough to bankrupt each of the companies.
But analysts doubt that will happen because they believe it unlikely that the companies will ever shell out a dime in the first place. Instead, industry analysts expect the companies to appeal the verdict, which will likely drag on for years.
A scenario shared by several experts is that either the Florida State Supreme Court, or the U.S. Supreme Court, will hear the appeal and strike down Friday's verdict on grounds that the $145 billion penalty is excessive and that it violates other constitutional issues.
A Florida law passed last year caps the amount a company can be forced to put up for bond in a lawsuit at $100 million.
Looking ahead, analysts believe that Friday's verdict will not have an impact on earnings or revenue. First, the companies have been budgeting about $1 billion a year to pay for attorney fees and other litigation costs related to such class action suits. That means the companies are not likely to raise the cost of cigarettes strictly because of the suit.
"My initial reaction is no, it will not bankrupt the companies," tobacco industry analyst Ann Gurkin of Davenport & Co. said. "Florida passed a law that if companies have to post a bond to pay huge punitive damages, it's capped. But that law has not been tested."
While Gurkin believes the companies will remain on solid footing, having socked away enough each year to pay for litigation, she is not sure whether the verdict will ultimately affect sales in the long term.
"Our viewpoint is that we fully expected the jury to come back with an amount of money like this," Sanford C. Bernstein analyst Bill Pecoriello said. "The industry will never pay a dime of this. It will win on appeal, possibly in the Florida Supreme Court or likely the U.S. Supreme Court."
Pecoriello said the stocks will take a hit, but not as badly as most predict because the verdict should not come as a surprise to investors.
"The stocks have taken a hit over the last couple of days," Pecoriello said. "Once [plaintiff's attorney Stanley] Rosenblatt asked the jury for $150 billion, we believed the jury was going to give him that."
Investors also share that view and do not believe the verdict will take any serious toll on tobacco stocks down the road.
"The stock itself had a lot of time to digest what everyone knew," said Les Grober, a global equity portfolio manager with Laketon Investment Management. Laketon manages more than $2 billion of global equities. It sold off its stock in Philip Morris, which made up 2 percent of the firm's global equity portfolio, last year. "The only thing that is surprising to some is the size of the damage award itself. The jury is sending a statement to big tobacco, but among the investment community at large, it's clear this case will be won on appeal, with the high probability of class de-certification."
Grober said he expects the company's shares, and probably those of the other companies, to rebound from here.
Frank LaSalla, Chief Executive Officer of BHF Securities, told CNNfn's Market Coverage program that the stocks have already absorbed most of the bad news, but that plaintiffs need to be cautious about how much they seek in damages, or else they could end up with nothing. [546K WAV] [546K AIFF]
David Adelman, an analyst with Morgan Stanley Dean Witter, said he's almost certain none of the companies will pay a dime once all decisions and appeals are in place.
But the stocks of Philip Morris, R.J. Reynolds, Brown & Williamson, Lorillard Tobacco, and Liggett Group will take a tremendous hit in the beginning, he said, although he doesn't expect that to last.
"In the short term, stocks trade on emotions and psychology. It's not going to be very good," Adelman said. "This is going to be one of the most newsworthy events in quite some time ... They're not going to pay a penny."
However, should the companies be forced to pay such a high penalty, Adelman said, the companies will declare bankruptcy and will become the property of the plaintiffs.
"They'll turn the facilities over to the plaintiffs and they'll make cigarettes," Adelman said. "It would have the most significant effect on the current shareholders and employees would lose their jobs."
Shares of Philip Morris (MO: Research, Estimates) were down 3/16 to 24-11/16 following the verdict Friday. RJR (RJR: Research, Estimates) shares dipped 7/8 to 26-1/4.
Shares of British American Tobacco Corp. (BTI: Research, Estimates), parent of Brown & Williamson, were down 3/8 to 12-3/8.