Банкеръ Weekly

Briefs

RISING FROM THE SMOKE

Who on earth would want Geoff Bible's job? The man is marked--as the most powerful CEO in the most censured industry. He is bound--to hand over at least $4.5 billion of his company's annual cash flow to the states that sued Big Tobacco in the late 1990s. And he is gagged--from talking to the press, by his own damn lawyers, again. This time, though, the Philip Morris boss isn't ducking because of bad news. On the contrary: Bible has a terrific story to tell. Profits have rebounded. Philip Morris shares have more than doubled in the past year, making it the best-performing stock on the Dow. And Bible is cooking up a megadeal: the IPO of Kraft, his company's $35-billion-a-year food unit. That is what explains his silence; until Kraft stock gets served to investors this summer, Bible is restricted by the SEC's quiet period. If he could talk, he would surely point out that Kraft will be one of the largest IPOs ever. Indeed, if Philip Morris weren't holding on to a majority stake in the company, Kraft would instantly join the upper ranks of the FORTUNE 500.
All of which is pretty amazing when you think about it. Not that long ago, Philip Morris was widely perceived as a giant in irreversible decline, with sputtering sales, dwindling profits--and severe litigation problems that just kept getting worse, as the anti-tobacco forces seemed finally to have gained the upper hand in their decades-long struggle against the cigarette companies. In February 2000, as the industry anticipated a big defeat in a Florida class- action suit, Philip Morris' stock sank to $19 a share, its P/E a pathetic six. (A few months later, the Florida jury awarded an almost unimaginable $145 billion in punitive damages.)
Not that investors were paying much attention to Philip Morris back then--why would they, with tech stocks still in the stratosphere? But while no one was looking, Bible was figuring out how to play the hand he'd been dealt. Which is why, now that tech is in its own version of a death spiral, Philip Morris is what's smokin', with record profits ($8.5 billion last year, on $80.4 billion in revenues), increasing market share in its key businesses--except for long- suffering Miller beer--and a $47 stock. It has 15--count 'em, 15--brands that each generate over $1 billion a year in sales, including Marlboro, Maxwell House, and Oscar Mayer. It has become not only the largest but also the most profitable consumer packaged-goods company in the world. That has happened, in no small part, because Bible has forced Philip Morris to make huge changes in the way it goes about its business, and even in the way it thinks about itself. As he put it in a speech this March, Philip Morris defines itself not as a tobacco company, but as a consumer products company, with particular expertise in products intended for adult consumers.
For now, at least, tobacco remains the core of Philip Morris, supplying two-thirds of its operating income. Rolled up in that fact is a big surprise: For all the problems associated with cigarettes, its tobacco operation just had its best year ever, with $10.6 billion in operating profits. In fact, Philip Morris has managed this feat despite being on the hook for half of the staggering $254 billion (over 25 years) that the industry is handing over to the states to settle its legal battle. It turns out that Philip Morris has been able to cover its settlement costs (and then some) with hefty price increases--due not so much to marketing magic but to the fact that cigarettes are so addictive that many customers can't quit. Second, though U.S. cigarette consumption is clearly declining, Philip Morris has stayed on top by grabbing market share. Marlboro alone has a record 37% of the market--up from 22% in 1993 (just before Marlboro Friday, the infamous day when Philip Morris slashed cigarette prices and ravaged its stock). And after a couple of rough years, international tobacco is back on track, with operating income up 5% in 2000.
What's more, despite last year's Florida verdict, the regulatory and litigation clouds are lifting. The Supreme Court ruled last year that the Food and Drug Administration has no jurisdiction over tobacco, a big victory for the industry. The states, now hooked on tobacco money, have little incentive to further punish Big Tobacco. As for that whopping verdict in Florida, many legal experts predict that an appeals court will dismantle the case and toss out the punitive damages. Says Salomon Smith Barney's Martin Feldman, the tobacco industry's top-ranked analyst: There's a lot more clarity on the litigation front than two years ago.

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