Will Philip Morris Be Smokin' in 2001?

The past year was a wild ride. It was turbulent and emotional, action-packed and stress-inducing. Anybody got a smoke?

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Read My Lips: No New Tax Cuts?

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Smashing the Market Crystal Ball

Will Philip Morris Be Smokin' in 2001?

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For many investors unnerved by the violent swings of 2000, relief came in the form of, well, not a cigarette, but a cigarette maker, Philip Morris(MO Quote). In our continuing look ahead to the new year at Stock in the Spotlight, we've been sifting through our screens to find some comfort after the rough and tumble of recent months. Today, we're taking a drag of Big Tobacco.

The tobacco giant has had a stellar year amid the tech woes and financial uncertainties. After hitting astronomical gains of almost 80% in the year to date, some Wall Streeters think the company looks as though it might be able to hold on to this momentum. It wasn't all roses and sunshine for the company, though.

Big Tobacco has been surrounded by a dark cloud of litigation for the past few years -- lawsuits by the list, many of which have come to a head in the past year. Last month the Florida Supreme Court (busy month, eh?) upheld a jury verdict against a tobacco company for the first time. This finding has added new fervor to the follow-on litigation of the now famous Engle class-action suit. In July 1999, a group of tobacco companies, including MO, was found liable of fraud, negligence and smoking-related illnesses in the Engle suit. This resulted in a $145 billion settlement by the tobacco consortium.

And the lawsuits continue. With more before the year's end and a laundry list of others scheduled for the first half of next year, things could look grim.

Amid, or even in spite of the legal woes that are clinging to MO, the company has forged bullishly ahead. The Engle case looks like it may go to the appellate courts, meaning it will have no effect on the company for at least a year.

"In general, I'm fairly optimistic about the appeals process" in the Engle case, said Aaron Westrate, stock analyst at Morningstar.

The optimism may reflect MO's record in court: Out of 27 motions for class certification in cases against Philip Morris, 24 have been rejected.

The Philip Morris File

Operations

Business: World's biggest tobacco company, also owns food and drinks businesses.

1999 Revenue: $78.6 billion

1999 Earnings Per Share: $3.29

2000 Estimated Earnings Growth: 13%

Stock Snapshot

52-Week Range: $18.7 - 44.5

Percentage Change from Jan. 1: 88.3%

Market Cap: $98.1 billion

P/E Multiple: 12.3

Shares Outstanding: 2.2 billion

"Despite the litigations, the tobacco group is still immensely profitable," said Westrate. Earnings per share are expected to grow 13% this fiscal year, and 10% in the following. Philip Morris has met earnings estimates for the first three quarters of this year and is expected to meet estimates in the fourth quarter as well.

"The tobacco business generates a ton of cash," continued Westrate. Big Tobacco weighs in with a market cap in the heavyweight realm of $90.2 billion. Add in the figures of a low $40 range share price and a price-to-earnings ratio of 12.3, and you have a sum total to watch next year.

But Philip Morris' purple mountain majesties extend far beyond its amber waves of tobacco plants. Big Tobacco acquired Nabisco Holdings for about $15 billion last June, while cigarette competitor R.J. Reynolds(RJR Quote) bought up the parent company, Nabisco Group Holdings. MO additionally holds a Kraft Foods subsidiary. Add to this its Miller Brewing unit and you have all the staples for a kickin' party.

Come 2001, the guests could come flocking.

"One of the things I think is really positive is that [MO] is going to be spinning off their Kraft Foods division," with eventual plans to spin off the entire food group, said Westrate, adding that Kraft is "widely viewed as being one of the strongest food companies out there." Strong food, strong tobacco -- strong like bull.

Another perk for Philip Morris: Consumer staples tend to do better in market down cycles and a constricting economy. In fact, MO affirmed its earlier earnings projections for the next three years in early November.

5 Day

5 Year

And with foreign revenue accounting for approximately 51% of company revenue, according to Morningstar, the euro's expected strength in the coming year can only make MO's future look mo' better.

Looking forward, Westrate acknowledged that "the tobacco industry is difficult to handicap" and the future of its members or the direction of their stocks are hard to predict. But, "it's a well-run company in every division," he said. "The Kraft division is going to be really interesting to watch."

Below are the 10 funds with the most faith -- and largest holdings -- in Big Tobacco. Seems they're all hoping that after the tech wreck of 2000, the smoke will clear, and the smoke makers will remain standing tall.

Funds With the Biggest Stake in Philip Morris
Fund	Percentage of Assets in MO	1-Week Return	YTD Return
(KDHAX Quote)Kemper-Dreman High Return Equity A	9.1%	1.7%	35.7%
(CLPRX Quote)UAM Clipper Focus Instl	8.2	-0.7	36.4
(MISEX Quote)Midas Special Equities	7.1	-10.6	-24.5
(CFIMX Quote)Clipper	6.2	0	31.9
(FKINX Quote)Franklin Income A	5.9	1.8	19
(FDFAX Quote)Fidelity Select Food & Agriculture	5.7	1.5	25.4
(HBFBX Quote)Hennessy Balanced	5.6	-0.7	2.3
(SDWAX Quote)SunAmerica Dogs of Wall Street A	5.4	0.5	-4.1
(WILVX Quote)Williamette Value	5.4	-1.3	-7.1
(LOMAX Quote)Edgar Lomax Value	5.3	-2.3	2.6

Background Check Check out these recent TheStreet.comstories on MO

Philip Morris Braves the Storms, Fights the Fights and Comes Out a Winner (12/13/00) : When even the Winston man starts telling people that smoking is a drag, you've got to wonder if the tobacco business is on its way out . . . more

Philip Morris Reaffirms Earnings Expectations (11/8/00): Philip Morris affirmed previous earnings projections for fiscal 2000 through 2003 and said it expects to complete the acquisition of Nabisco Holdings by the end of the year . . . more

Update: Philip Morris Agrees to Acquire Nabisco Holdings for $14.9 Billion (6/25/00): Philip Morris said on Sunday that it agreed to buy Nabisco Holdings for $55 a share in cash, or about $14.9 billion, plus the assumption of $4 billion in debt . . . more