By: Billy Fisher

Contributor, Stock Traders Daily

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(La Jolla CA)  The U.S. government won what has been dubbed a “landmark ruling” over cigarette manufacturers on Friday. The victory appears to be more symbolic than anything else.

Pyrrhic Victory

In what has been 10-year battle so far, the damage to shareholders as the result of this ongoing litigation has been very negligible. The stock prices of U.S. tobacco companies such as Altria (NYSE: MO - Free Trading Report), Reynolds American (NYSE: RAI - Free Trading Report), Lorillard (NYSE: LO - Free Trading Report) and Vector Group (NYSE: VGR - Free Trading Report) each yawned off Friday’s ruling finishing virtually flat on the day.

The ruling upheld requirements that will restrict cigarette manufacturers from marketing their products as “light”, “low tar” or “mild”. The battle is not over for either side of this case. Altria has already said that it will appeal this verdict to the Supreme Court. And what may have been the most important development in the case was U.S. District Judge Gladys Kessler’s finding that it was not within her power to force the companies to pay $10 billion for a smoking cessation program sought by the government. 

Industry Transformation 

The legal battle that Altria has had hanging over its head for years, was a contributing factor behind the company’s decision to split-off Philip Morris International (NYSE: PM - Free Trading Report) last year. The thinking was that the litigation factor had been weighing on the company as a whole, and by splitting off the company’s international operations, shareholders would realize a greater value for their shares as PMI would not have the same degree of legal headaches to deal with.

Although litigation is the most visible challenge that the industry is facing at the present moment, the more pressing issue has been the need to compensate for declining domestic cigarette shipment volumes. The industry has been able to address this challenge so far by relying upon its pricing power as well as shifting its focus to smokeless tobacco which is being viewed as a growth area. In 2006, Reynolds American purchased Conwood to break into this market and Altria bought UST in a $10.4 billion deal this past fall for similar reasons.

Friday’s ruling may have given advocacy groups a reason to celebrate, but significant monetary damage to big tobacco and its shareholders has yet to occur. I don’t see any major reason for shareholders to be alarmed or to dump my shares at this point. In any event, this situation will be an interesting legal saga to stay tuned to. 

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