September 6, 2009: Tobacco Stocks: Smokin'.

Tobacco companies jointly filed a lawsuit in Kentucky against the U.S. and the Food and Drug Administration, claiming a law signed by President Obama in June of this year imposes "unprecedented restrictions" on First Amendments Rights.

For instance, the law prohibits tobacco companies from jointly marketing their cigarettes with non-tobacco products. Also, they can't market or describe any products as less harmful than others unless they have approval to do so from the FDA. This includes a new generation of smokeless products, which may be less harmful than cigarettes. Or, not harmful at all.

Interestingly, Altria (MO), the nation's largest cigarette maker, oped out of the group's lawsuit. It appears that Altria is hurt less by the new law than smaller competitors because it already has a huge market share.If fact, Altria backed the new law.

True, cigarette makers have seen sales shrink over the past several years. However, I believe that several American tobacco companies will do very well in the future for several reasons.

As prohibition taught us, the more a government restricts a product, the intrinsic demand rises and the more profitable the product becomes. Well-cured tobacco leaf is still a worldwide indulgence and few areas grow tobacco of better quality than in the United States. Tobacco companies will pursue ways to cut the cost of tobacco products (such as making shorter cigarettes that are being successfully test-marketed in Florida and elsewhere). Tobacco companies will enhance their marketing offshore and offer U.S. quality tobacco and products other countries cannot match.
The huge lawsuits against Big Tobacco are winding down and the Feds and State governments, having squandered most of the billions in tobacco settlement monies, have no legal means to extort more monies from the tobacco companies.

Tobacco users in many states are creatively growing their own tobacco, which is legal. They can also sell it without Federal and State tobacco taxes if sold be the whole leaf (uncut). Some tobacco companies have shown an interest in micro-growers to support their efforts at unique regional blends - adding cachet to their product lines. In northern Ohio, for instance, good quality tobacco is being grown and used to excellent reviews by both producers and users.

Here are some tobacco companies that are likely to thrive under almost any Federal legislation:

Reynolds American (RAI) $46.60/7.30% yield/$13.7b market cap

Vector Group (VGR) $15.87/10.02% yield/$1.1b market cap

Altria (MO) $18.50/7.35% yield/$38.3b market cap

Alliance One International (AOI) $4.10/0% yield/ $356.7m market cap

Universal Corp. of Va. (UVV) $38.07/4.81% yield/$950m market cap


With prescription drugs floating about in our nation's water supply, mass killings on or southern borders and elsewhere as gangs smuggle tons of illegal narcotics into the country, meth labs and worse cooking up fatal brews for hundreds of thousands of addicts nationwide, marijuana a primary income source for many of America's rural counties and alcohol taxed and given a wink and a nod by government so long as taxes are paid, cigarettes seem to be, while not benign, certainly a less fatal avenue of relaxation that society should accept without encouraging.

Tobacco companies know this, and will adjust their product to compete positively with more sinister plants, drugs and other concoctions.