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The Smoke Around Big Tobacco Clears

By Howard Choe On May 21, Standard & Poor's upgraded its opinion on two tobacco companies. It raised Altria Group (MO) to hold from accumulate, and R.J. Reynolds Tobacco (RJR) from avoid to hold. We believe the overturn of the $145 billion Engle verdict will provide a boost for the industry since tobacco outfits will likely attempt to apply similar arguments to pending cases. The Engle case, which was filed by a group of Florida residents suffering from medical ailments caused by cigarettes, was the first class action against cigarette makers to move to trial.

The May 21 ruling by the Florida Third District Court of Appeal reversed a jury verdict reached in July, 2000, that had found the five largest U.S. cigarette producers liable for the illnesses of about 500,000 Florida smokers and ordered the companies to pay $145 billion for misleading them about smoking's risks. The Florida appeals court reasoned that the case proceedings were tainted by class counsel's misconduct and that the award is bankrupting under Florida law.

DETERRING OTHER SUITS. In addition, the appeals court ruled that the case should not have had class-action status since each smoker in the case had "unique and different experiences that will require the litigation of substantially separate issues." Today's ruling and future verdicts in favor of the tobacco industry may deter further class actions and weaken plaintiff arguments in pending cases.

The S&P Tobacco Index jumped nearly 9% on May 21 on the news. While this doesn't fully remove the litigation cloud over the industry, we at S&P now see the threat as less ominous. Coupled with attractive dividend yields and solid market positions, S&P is more bullish on Altria (formerly Philip Morris Cos.) and R.J. Reynolds. Analyst Choe follows tobacco stocks for Standard & Poor's

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