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. Last Updated: 07/27/2016

Tobacco Industry Suits Spook Some Investors

NEW YORK -- How long can Wall Street stay bullish on tobacco stocks?


First, Bennett LeBow agreed in March to settle lawsuits brought by five states against his small tobacco company, Liggett Group Inc., a unit of Brooke Group Ltd., the first settlement of tobacco litigation in history.


Then a jury awarded $750,000 Aug. 9 in a Florida personal injury case against Brown & Williamson Tobacco Corp., a unit of B.A.T Industries Plc.


If it holds up on appeal, it would represent the first time a tobacco company was found liable for its product, a verdict that has eluded attorneys trying to base their class-action suits against the industry on similar grounds.


Jury experts now say the days of big tobacco's invincibility are over, and Fitch Investors Service, a bond-rating agency, said last week that the Florida verdict could have profound consequences for tobacco companies' bonds.


Fitch is the latest of a handful of investment advisers and analysts who are worried about tobacco stocks.


The stocks, which tumbled after the verdict, have fallen on news about new lawsuits in the past, but the shares have usually recovered. The reason is the tobacco business is immensely profitable.


While some investors have grown wary of the stocks, others are unfazed.


"I think the [Florida case] is few and far between, nothing to get too excited about," said analyst Gary Black at Sanford C. Bernstein.


Black, whose firm owns 1.7 percent of R.J. Reynolds' parent, RJR Nabisco Holdings Co., has not changed his bullish ratings on RJR Nabisco, Philip Morris Cos. or UST Inc., the leader in U.S. sales of smokeless tobacco.


Emanuel Goldman, an analyst at Paine Webber in San Francisco, said the fundamental earning capabilities of the companies remain unchanged.


"It's a very unusual situation when you'll find a jury with sympathy for a smoker," Goldman said. "People still have no sympathy for smokers."


Nonetheless, some analysts have cut their ratings on tobacco stocks. Salomon Brothers and UBS Securities both changed their recommendations early last week, cutting the tobacco stocks they rate to "hold" from "buy."


The tobacco companies have said little except to call the verdict an "aberration" that they believe will be overturned on appeal.


"We're still making cigarettes," said a spokesman for New York-based Philip Morris. Others are starting to see things in a different light.


Fitch, a major rating agency based in New York, said its bondholders must consider whether there has been a perceived weakening of the tobacco industry's traditional defenses


It said the Florida verdict may result in similar verdicts that could cause massive financial claims against the industry. While it said it was not planning to change its ratings on tobacco bonds, it said it would continue monitoring the litigation progress against the industry.