University of Chicago
. Adelman joined
Morgan Stanley Dean Witter
in 1990 and is the principal tobacco and packaged foods analyst. He has testified before the
Senate Judiciary Committee
regarding national tobacco policy.
Industry Outlook and Style
Adelman is bullish about this sector despite the mid-July ruling against Big Tobacco in the widely publicized Engle class-action lawsuit. (In that case, a Miami jury ordered cigarette makers to pay plaintiffs $145 billion in punitive damages, the largest amount ever awarded in a civil case. See our related
story.) He cites two factors that are strengthening operating fundamentals.
First, he points to the general economic recovery in emerging markets, many of which were plunged into crisis in the wake of Russia's August 1998 government bond default and currency devaluation. The tobacco industry, while less sensitive to macroeconomic factors than some other industries, did suffer during this crisis. The improving macro conditions in emerging markets should boost revenues as consumer confidence builds and demand for tobacco products increases.
More important, he believes, is the stabilization of the U.S. cigarette market after the fallout from two price hikes since last August that totaled 31 cents. Those hikes were passed on to consumers to cover the $208 billion cost of the industry's November 1998 settlement with 46 states over Medicaid funds spent on tobacco-related illnesses. Although the price increase made a sharp dent in 1999 sales -- shipments fell 9% -- Adelman contends that consumers have now adjusted to the higher prices. (A further price hike is expected soon.)
Adelman believes that business fundamentals are particularly strong for
. Among other brands, Philip Morris manufactures Marlboro, which he calls the "powerhouse" brand in the U.S.
"Tobacco is a pretty predictable business," says Adelman. He notes that all of the major companies have fairly consistent financial results and that consumers tend to be brand-loyal. In addition, Adelman describes industry trends as "glacial in pace." What makes this industry unique, he explains, "is that valuations, sector performance and investors' perceptions over the last six to seven years have been more a function of the perceived legal and regulatory risk facing the industry than the business outlook."
Adelman cites numerous statistics favoring the tobacco companies on the legal front: 28 large-scale class-action suits against the industry have been dismissed by the courts, the industry has won 12 of 15 smoker trials since 1996 and the U.S. Supreme Court has found that the
Food and Drug Administration
lacks tobacco regulatory authority. "Big picture, I think the legal environment's getting better, although the market has not reflected that as of yet, largely because of the Engle case, which is the one exception to the class-action success that the industry has enjoyed." Like many observers, Adelman predicts that the case will be overturned on appeal. "Over time, the market will recognize that the Engle case is an anomaly," he says.
Clients commend Adelman for his ability to gauge the impact of legal and regulatory rulings on stock performance. One voter in
Analyst Rankings -- Equity 2000
praised Adelman for being "very helpful in the tobacco litigation," while another raved that he is the "best in the space by far!"
Because of investment banking relationships at Morgan Stanley, Adelman is restricted from having an opinion on Philip Morris or R.J. Reynolds Tobacco( RJR). Among those stocks on which Adelman has a rating, British American Tobacco is the highest-rated, with a market outperform.
Rate Their Stock Picks:
Which stock do you like best?
Feldman and Cohen: Philip Morris
Adelman: British American Tobacco