Tobacco Documents Online

••CIGARETTES SPREADING THE RISK Thanks to diversification and foreign expansion, producers have been able to show handsome profits despite health issue. But investors seem unconvinced. Shares conservatively valued WITH THE average annual gain in cigarett'e consumption creaking along at the rate of only 2% a year, Wadl Street's sentiment toward tobacco stocks has been anything but opti- mistic: "Health scares and advertis- ing restrictions are killing the busi- ness," wails one investor. "You look at it in the long run and cigarettes have got'~ about as much future as snuff." But the fact is that the big ciga- rette companies-with earnings up smartly im most cases-are far from moribund. Growth over the past few years has proceeded at a stronger pace than in the period immediately preceeding 1961 when cigarette stocks hit a1Minte highs. A price hike in mid-1967 contributed, but the reat thrust was provided by diversifica- tion and the burgeoning foreign market. Last' year almost one fourth of the "Big Five's" sales (excluding excise taxes) came from non-tobacco prod- ucts. Expansion has been largely into food and liquor where the cigarette companies can draw on their con• siderable lnarketing resources, but recent' movles are taking them further afield. American Tobacco, which is planning t';o take over Duffy-Mott, Phil ip Morris ~ FINANCIAL WORLD 0 /\ugust 21, 14.8 the food processor, has also put in a bid for Russ Togs, a leading apparel' maker with sales of $96 million. American's diversification~ drive started in 1966 with~ the acq;uisition of Sunshine Biscuits, followed in 1967 by Beam Distilling, a top bour- bon producer. Last year 23% of sales were derived'from non-tobacco prod- ucts, and' inclusion of Duffy-Mott and Russ Togs,this year would raise the percentage sharply. The decline in first half profits stemmed from a 25-day strike earlier this year and imposition of the tax surcharge. . Liggett & Myers drew 25% of total revenues last year from non-tobacco products. The company has a 92.8% interest im Paddington Corporation„ sole importer of J & B Scotch whis- key, and a 50.5% interest in Carillbn which imports liquor, wine and cordials. Agreement to acquire Aus- tin-Nichols, another liquor importer, is awaiting stockholder approval. Other acquisitions include Allen Food, maker of Alpo dog foods;, Na- tional Oats, a producer of packaged cereal, popcorn and livestock feed; and-pending stockholders' approval -Ragu Packing, a producer of Ital- ian food specialties. Food Compet'itors, Too The latter will have L & M com- peting across the dinner table with R. J. Reynolds, which set up~ a sub- sidiary in 1966 to handle its growing line of convenience foods. They in- clude Chum King Chinese foods, Patio FoodsMexican specialties, Hawaiian Punch, Vermont Maid syrups, Brer Rabbit Molasses and College Inn canned~ goods. Also in the Reynolds line-up are two pack- `' aging, companies, Archer Products and Filmco. " Lorillard, actually capitalizing on the cigarette scare, has pushed ' strongly into small cigars, which it ' markets under the brand names Be- tween the Acts, Madison, Omega and . Erik. It also introduced True, a high- '. filtration cigarette launched on Fed- ` eral Trad+; Commission reports citing':" its comparatively lbw tar and nicotine '' content. Non-tobacco lines include ". cat food, candy and paper packaging,' ': but an attempt to move into liquor• '' . via acquisition of Shenl?vy Industlries `" came to naught. Lorillard attributes "lower second' quarter earnings to the a combined effects of the surcharge and a sales bulge a year earlier re-'' sulting from customer efforts to beat` . the mid-year cigarette price hike. ,'Philip Morris started tobranch" out as far back as 1957 when ' it bought Milprint ' Converting (paper packaging materials) an& Nicolet 'f Paper. Since then it's added Polymer : Industries (industrial. adhesives and ", ~ textile chemicals), Clark Gum (chew- _ . ing gum), American Safety Razor (shaving supplies) and Burma-Vita (men's toil?rtries). While diversification has become a major preoccupation at home, the tobacco companies have been quick t' to exploit the rapid growth in tobacco demand abroad. According to the Department of Agriculture, world consumptiom is building at twice the U.S. rate, although Americans still smoke four cigarettes per capita to every one consumed abroad. Exports have been hampered somewhat by - t t ~3 Pl o page ease urn ~ ``0~~`~1"R\C3~~~1~~°~~:.. ~ CIGARETTE LEADERS Americen Tobacco .................... lieptt & Myers .......................... Lorillud Corporation ......... _....... Philip Morris, Inc . ...................... peYnoltls (R. 1.1 Tabecco .............. 1002402497: r----Earned~Per Share ---, ;, . . , i ,. . r-- Six,Months -, ~ Annual ~ tDivi- Recent SP/E r.a 1968 1967 1967, 1966 dends Price Yield Ratio $1.47 ;1.43 ;3.15 53.01 ;1.90 34 5.6% 11 1.33 1.32 2.98 2.76 2.50 41 6.1 14 2.15 2.16 4.67 4.35 2.70 59 4.6 , 13 2.02 1.76 3.94 3.08 1.80 53 3.4 ,43 ~ ; ' -1 71 1 68 3:73' 41 3 20 2 41 5•4 11 . . . . . • 'tlndicated rate. YBesed on letest 12 months earnings. .>t. ,,, . • .:i.1) ,_ .. ... :.. . . .. , . . .. ,... ~ .i' ..~. . . 1n y ?la~IIl'!rtB . r?[ ~Y; ,f^l ~:-.. • cJQ1w .1+t1:-ri/t1-7

GIGI"SRETTES- SPREADING THE RISK Continued~ f~rom~ pag,e~~ 7~ ~ tariffs an& import restrictions, but' UIS. prodkicers have overcome them by creating foreign subsidiaries, af- filiates and' licensees, „ R. J. Reynolds ranks as the larg- est cigarette exporter. But Philip Morris, with distribution outlets in, 150 countries and territories, has, made the greatest inroads in the: foreign market; its international divi'sion1ast year accounted for about 20% of total sales and 25 % . of net income. Pointing to an average an- nual growth rate of 24% in overseas salps, management looks ahead to II the time when unit volume and'profits from foreign cigarette operations , will equal those in this country. Recently Philip Morris , locked horns with American Tobacco in a struggle for control of Gallaher Ltd., Britain's second largest maker. of tobacco products. Philip_ blorris Qf- fered' Gallaher shareholders . $3 a share in late June. But American Tobacco, already the holder of 12:9% of Gallaher's stock, countered with a tender offer of $'4.20, oX:.40% more than Philip 14lorris ; at the same time it boosted its holdings to 28% by buying stock on the open market'.,I Gallaher directors, after opposing the Philip Morris offer, are reported to favor the American bid, which would raise its ownership to over 50%. Outlook Hary On the domestic front, the outlook for cigarette sales remains hazy. Ad- vertising, restrictions have grown tighter, and now the Federal' Trade i Commission is urging a ban on all radioan& television cigarette com• mercials. However, in Great' Britain, where such a ban has beem in effect for three years, cigarette sales have continue& to build; similar experi- ence is reported from Sweden, West Germany and Canada where partial bans are in effect. Apparently hard- core smokers are not going to change their habits, regardless of warnines or advertising black-outs. There is, of course, the possibility that this group may dwindle over the next few years, reflecting a gradual ever, efforts by the industry to pro- duce a cigarette free of cancer-caus- ing agents could some day pay off, and in the meantime entry into non- tobacco fields provides the companies with new growth outlets. But for all their potential, the ciga- rette stocks have not' been able to shake off the stigma that comes with being in the tobacco business. Where many issues commanded price/earn- ings multiples in the 20s during the shrinkage in the number of young early 'sixties, the average now, is people who take up smoking. How „ around 12. For investors this means FINANCIAL WORLD • August 21, 1968 -:r'.r!zs;T' some unusual opportunities. Ameri- cam Tobacco, Liggett & Myers and R. J. Reynolds-each combine above average yield with long-term growth prospects; then, to0, the_concentra- tion of their product lines in'defen- sive areas adds a"'- atrong , safety = factor. The dividend return on Philip ' ' Morris is slimmer; but an excellent 4 -growth record combined'with the low P/E ratio gives;'the shares _ strong capital gains potential, I{orillard also has appeal for moderate income and " '- I appreciation' possibitities:`.*°"`s`'~~ s;41 ,tf ~;uplA r .t~JR,OW JAf-VANIj