University of the Witwatersrand
, Johannesburg; L.L.M. (master's degree in law),
. Feldman follows both U.S. and European tobacco companies at
Salomon Smith Barney
, which he joined in 1994. Before that, he worked as an investment banker at
in London. He has testified about the tobacco industry before the
Senate Commerce Committee
Senate Judiciary Committee
Industry Outlook and Style
Long cautious about the impact of the tobacco wars on stock prices, Martin Feldman has turned more positive on his stocks. The analyst, known for calling the impact of litigation on tobacco stocks, attributes his improved outlook to a March discovery. His on-the-scene research during the Miami-based Engle case uncovered Florida's plans to pass legislation capping defendants' bond requirements in class-action lawsuits at $100 million per company. Though the measure, passed in May, aimed to protect the flow of payments to the 45-plus states that had agreed to out-of-court settlements with Big Tobacco in 1997 and 1998, it also effectively ensured that the industry would not be ruined even if it lost the high-profile class-action lawsuit. (It was Feldman, who, in a memo to clients, broke the news that this legislation was in the works.)
The cigarette makers did indeed lose the Engle case -- the verdict announced earlier this month called for punitive damages totaling $145 billion, by far the largest amount ever awarded in a civil case. (See our related
story.) But if the judge respects the state's brand-new bond-capping law, the companies will have to pony up only $100 million apiece for now. This leads Feldman to estimate that the "Engle risk" has been overdiscounted by the market. Indeed, the sector has recovered slightly, rising 30% from its March lows.
Institutional clients appreciate Feldman's personal attendance at the tobacco trials. He's "really on top of the litigation issues driving the tobacco stocks this year," noted one voter in
Analyst Rankings -- Equity 2000
Though Feldman sees litigation as an integral part of the tobacco environment, he thinks its prominence will recede over the next 12 to 18 months. As this happens, he predicts, major companies will focus on enhancing shareholder value by such methods as stock buyback programs, spinoffs of subsidiaries and increased dividend payments. "The recent announcement from
that it intends an IPO of a small proportion of its
unit adds momentum to my view," he says. He currently has buy recommendations on both
British American Tobacco
. SSB has done recent underwriting work for Philip Morris, but not for BTI.
In another restructuring case, Feldman upgraded
R.J. Reynolds Tobacco
to a buy in anticipation of the company's June 1999 restructuring. But he subsequently downgraded it to a neutral following the resulting rise in price. He maintains his neutral rating today, citing continuing loss of U.S. market share. SSB has not done recent underwriting work for RJR.
One downside for the group Feldman points to: the strong dollar, which is taking a bite out of overseas earnings for U.S. tobacco companies, the analyst says. Still, he believes the winning companies will be those that can build international brands. In the same way that Philip Morris has successfully built its Marlboro brand into the world's largest, he sees the major international players focusing on a couple of key brands: Lucky Strike and Dunhill in the case of British American Tobacco, and Camel and Winston in the case of
Favorite stock for next 12 months:
"Philip Morris has the best fundamentals of any international tobacco company, and in my view, the litigation impact on its valuation is overdone."
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Which stock do you like best?
Feldman and Cohen: Philip Morris
Adelman: British American Tobacco