Tobacco Debate Continues to Rage

The debate about how much of a legal weight has actually been lifted from tobacco shares continues to rage.

In the latest salvo, UBS Warburg downgraded Altria ( MO), saying that after a huge runup in its share price it has gotten expensive.

UBS cut the shares to neutral from buy. While the brokerage said last week's reversal of the $145 billion Engle verdict potentially clears the way for Altria's 84% stake in Kraft ( KFT) to be spun off, no such plans exist at this time, and Altria's shares have risen too much compared with rivals.

Investors took note and on a day when the Dow Jones Industrial Average rose about 2%, Altria lost 22 cents, or 0.5%, to $42.09.

The shares are still up more than 25% since last Wednesday, when a Florida appeals court threw out the $145 billion "Engle" judgment against five tobacco companies. The court said the case should never have been a class-action lawsuit.

While the Engle dismissal is good news, the company is not out of the woods. "The reversal of the Engle judgment does not mean the end of U.S. tobacco litigation and therefore the end of the valuation discount that the stock received compared to the domestic European and Asian tobacco stocks," Warburg said.

The opinion is the opposite of one put forward Thursday by CSFB, which said at the time there could be another 15% of upside in the stock. "Given the significance of the appellate court ruling and the recent State Farm decision, we believe an additional $15 billion of litigation liability can be lifted from Altria's valuation over the next 12 months, representing 15%-plus capital appreciation from current levels"

More downward pressure was created Monday by news that a U.S. district judge had refused to throw out advertising-related claims in a suit brought by the Justice Department against tobacco companies. Judge Gladys Kessler said there is enough reason to allow the claims to remain in the proceedings.

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