By Nanette Byrnes
Moments after the Illinois Supreme Court released its verdict in favor of Philip Morris on the morning of Dec. 15, the stock of parent company Altria (MO ) began to trade wildly. Within two minutes it had gained $4.42 and hit $78.15 a share, an all-time high. The news that Altria wouldn't have to come up with $10 billion in punitive and compensatory damages was, of course, welcome in and of itself to investors. But they're really betting that this will clear the way for the company to pursue a breakup in 2006.
Such a split of its tobacco from its Kraft food operations, Wall Street estimates, could result in a valuation of roughly $90 a share. Altria's management has firmly committed to such a plan, most recently in a November speech to investors by CEO Louis C. Camilleri.
With $11 to $12 a share of value still on the table, investors can't be totally blamed for hopping into the shares with such glee. But before joining in, there are a few reasons to be a bit more cautious.
Most of the analysts covering Altria are betting that the split up will occur in 2006. If that were to happen, and $90 is the right number, they would be looking at a 15% return. But the Illinois case is far from the only major litigation the cigarette maker is staring down.
The Justice Dept.'s RICO case against the major tobacco companies is currently being decided by Judge Gladys Kessler, and a loss could cost the defendants $14 billion. With half the U.S. market, Philip Morris would be facing a big bill.
The other big worry is Florida's Engle class action. Again, Philip Morris is one of several defendants facing an even bigger judgment of $145 billion in punitive damages. Though oral arguments were heard in November, 2004, no decision has yet been rendered. In addition, the plaintiffs in Illinois could also appeal the case to the Supreme Court.
Altria's board is unwilling to move forward on dividing the company if major lawsuits remain outstanding. But the wheels of justice grind slowly, and as Altria waits for a resolution in Florida and Washington, D.C., new lawsuits are being brought on a regular basis (61 were filed in 2005 alone). Some feel the most worrisome of these is the Schwab case, which involves light cigarettes. It's being heard by a New York judge with a track record unfavorable to the industry.
The fact that this case might delay a breakup until late 2007 or even 2008 was enough to cause Goldman Sachs analyst Judy E. Hong to downgrade the stock on Nov. 16 from outperform to in line with the market. Hong expected Altria to win in Illinois, but she argues that even beyond victories in these most-watched cases, it has more to worry about in the courts.
Altria executives have been arguing of late that their litigation risk is sharply lower. In his November address Camilleri said Philip Morris USA's case count had declined significantly, as had the number of cases going to trial. The total number dismissed this year, he said, is 135.
ONLY ONE WIN.
Yet all it takes is one bad loss to turn the current celebration somber. Don Yachtman bought heavily into the stock in 1999 for Yachtman Asset Mgmt. after the initial loss in the Engle case sent shares down into the $20s. But he has sold most of that position in the rise since, and he says declarations of victory are premature.
The Illinois case "was a long shot anyway," says Yachtman. "I wouldn't overread it. In the kind of litigation environment we have in this country, I wouldn't say anyone is out of the woods forever." In its most recent annual report, Altria reported on 70 different pending lawsuits, most of them tobacco-related.
Without a breakup in the near term, it's hard to see how a stock that has climbed 27% over the past 12 months could make much of a move from here. Putnam Investments got into the shares in 2003 and has enjoyed the ride up, but Managing Director Bartlett Geer says Putnam isn't adding to its position either. Though an $11 or $12 upside would be respectable in the current market, Geer sees better opportunities elsewhere. "It's not like you're getting the good news at the old price," says Geer. "You're getting the good news at the new price."
Byrnes is a senior writer for BusinessWeek in New York