Will This Ruling Impact Tobacco Stocks?

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U.S. District Judge Gladys Kessler has determined that major tobacco companies such as Philip Morris International (NYSE:PM), Reynolds American (NYSE:RAI), and Lorillard (NYSE:LO) will have to pay for a public advertising campaign admitting that they have lied about the dangers of cigarettes for years.

The decision is one of the most significant sanctions to emerge as a result of a racketeering case the Justice Department brought against tobacco companies in 1999, Bloomberg reports.

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So far this year, Lorillard and Reynolds American have underperformed against the S&P 500 by about 4 percent and 7 percent, respectively. Phillip Morris has seen more success, outperforming the S&P by about 2 percent this year to date.

How Will This Ruling Affect the Industry?

Legally mandated anti-smoking advertising campaigns are nothing new and legislators have been pushing for more explicit and graphic labels, higher taxes, and increased marketing restrictions for years. Continued growth despite these attacks indicates resilience in the industry, but it’s also undeniable that times are changing.

The American Lung Association reports that the number of adult smokers dropped 7 percent between 1965 and 2009. This number may seem like a relatively small decrease, but accounting for the population growth reveals an even more significant decline. The percent of adults who smoke dropped over 51 percent over the same time period.

The trend against smoking is no doubt largely thanks to the efforts of anti-smoking groups and legally mandated anti-smoking campaigns. This case would finalize the wording on specific phrases — known as “corrective phrases” — that would be required for the proposed advertising campaign, such as “Smoking kills, on average, 1,200 Americans. Every day.”

This kind of language being pushed constantly through media outlets coupled with more graphic warnings directly on packaging is sure to reduce the number of smokers.

Will the Ruling Directly Impact Tobacco Stocks?

There are two real costs as a result of the case. One is a cash charge equal to whatever the monetary cost of the campaign will end up being, and the other is whatever effect on long-term revenue the campaign will have by turning off consumers.

The cost of the campaign has not been established yet, but the cost will likely hurt short-term earnings. Short-term and long-term damage to the companies is likely to impact the stock price, but unless the cost of the campaign is immense there is no reason to expect panic selling.

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