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09:0.z iam EDT 26-Aug-96 Morgan Stanley (Renwick, John P. 212-761-7488) MO PHILIP MORRIS: ROGERS VERDICT BRINGS SIGH OF RELIEF • 40 • Philip Morris (MD): Rogers Verdict Brings Sigh of Relief John P. Renwick (212) 761-7488 Date: Rugust 26, 1996 Industry: Tobacco Type: Co.pany U pdate Ratingn Strong Buy Price: 88 52-wk Rng: 106-73 Price Target:110 FY Ends - EPS - Dec Curr Prior 95A $6.51 96E $7.65 97E $8.85 Qtrly - 10 - EPS Curr Prior 95R $1.68 96E f1.89R 5 Yr. LPS Growth: Dividend: 14.00 Shares Outst.: 5Yr Hist Rel P/E Rng KtY POINTS: -- CEPS - Rel.P/E P!E Curr Prior P/CE (SdP500) Pr/Bk 13.5 $8.49 10.4x 76% 5.4 11.5 $9.75 9.0x 67% 5.3 9.9 411.e5 8.0x 61% 5.1 -2Q- -3Q-- -4Cl- Curr Prior Curr Prior Curr Prior $1.67 $1.71 31.53 f 1. 97R t2. 0i $1.79 16% Debt to Cap.: 47% Yield: 4.3% Mkt Cap./Rev: 134% 823MM Mkt Cap.: 572,424MM 60-80% 5 Yr. Est. Rt7E: 50% We reiterate our Strong Buy rating nn Philip Morris' shares. Friday night's jury verdict for no damages comes as a relief for tobacco investors and should reflect favorably on MO's stock price. The outcome suggests that the Carter verdict of August 9 was not an absolute signal of future losses. Legal analysis of the Rogers case is pending, but we make the following observations: (a) Each individual lawsuit, however similar in claims made, is unique and must be tried and assessed individually. (b) The Rogers trial was considered a good barometer in assessing whether there truly has been a shift in juror perception, such that jurors ay be willing to award damages to plaintiffs who knowingly assumed the risks of smoking. R retrial of a suit that resulted in a hung jury in February 1995, the only key difference in this year's version of Rogers was the jury. In addition, it is likely that the jury was aware of the Carter verdict two weeks ago. - In a post-verdict press conference, the jury's foreman stated that the jury felt that the industry was generally negligent, but could not hold it more than 50% responsible for the illness and eventual death of the plaintiff's husband. The plaintiff claimed her husband's fatal cancer was caused by his addiction to cigarettes, and that the defendant tobacco companies failed to warn him of their addictiveness and health risks. The case originally ended in a mistrial in Feb. 1995, when 5 jurors sided with the plaintiff and one juror sided with the defendants. We continue to believe that the two types of lawsuits capable of delivering single, potentially bankrupting, economic blows -- class

actions and state/Medicaid -- cannot go to trial in their present forms. • i i If there has been a shift in juror perception, individual lawsuits will continue to be brought to court and future adverse verdicts are certainly possible. (The next scheduled trial, involving the same Jacksonville law firm that represented the plaintiff in Carter, begins in mid-October.) However, fending off doomsday, in our view, are (a) the $4-5 billion in annual EBITDA generated by MO's Domestic Tobacco division, (b) a lengthy appeals process, and (c) the likelihood that future litigants will pursue the strategy -- apparently successful in Carter -- of seeking relatively odest damages. (Note also that the judge in the Rogers trial denied the plaintiff's motion for punitive damages.) Hence, we believe there is value to the Domestic Tobacco division (whose EBIT is growing at 10-12R a year), even in the event of possible losses in subsequent individual lawsuitsg at MO's current stock price, our asset valuation model indicates a price/EBITDA valuation for this division of less than 1.0 times 1997 estimates. Given Philip Morris' projected 16% five-year EPS growth rate, a dividend that should rise at a similar rate, share repurchases that should reduce average shares outstanding by 3% a year, and an already substantial litigation discount in its valuation, we believe MO's stock should outperform even in an uncertain litigation environment. John P. Renwick (212) 761-7488 Morgan Stanley & Co. August 26, 1996 Last Written Report: Philip Morris (MO): Negative Verdict in Carter Trial -- 8/12/96 Within the last three years, Morgan Stanley & Co. Incorporated and/or its affiliates managed or comanaged a public offering of the securities of Philip Morris. Morgan Stanley & Co. Incorporated and/or its affiliates or its employees have or may have a position or holding in the securities, options on securities, or other related investments of issuers entioned herein. To our readers in the United Kingdom: This publication has been issued by Morgan Stanley & Co. Incorporated and approved by Morgan Stanley & Co. International Ltd., regulated by the SFA. MSI and /or its affiliates may be providing or may have provided significant advice or investment services, including investment banking for any company mentioned in this report. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Private investors should obtain the advice of their MSI representative about the investments concerned. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Where an investment is denominated in a currency other than pounds sterling, changes in rates of exchange may have an adverse effect on the value, or price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. This publication is disseminated in

Singapore by Morgan Stanley Rsia (Singapore) Pte Ltd. Additiona] information on recosmended securities is available on request. _ First Call Corporation - all rights reserved. 617/345-2506 END OF NOTE