Big Tobacco Dealt a Huge Blow by Australian High Court Decision

Tobacco companies suffered a huge blow this Tuesday as the High Court of Australia upheld the law that forces tobacco manufacturers in the country to sell their cigarettes in standardized olive green packs with large graphic images which warn of the health hazards of cigarette smoking. ^[1]

Companies including Philip Morris International (NYSE:PM), British American Tobacco, Imperial Tobacco and Japan Tobacco had initially challenged the law in Australia’s High Court on the grounds that the it is unconstitutional and has highly detrimental effects on the value of their cigarette brands. The law has been touted as the world’s strongest anti-tobacco measure to date. The court has not yet indicated the reason behind its decision, and is expected to do so in a report which will be published soon.

See our full analysis for Philip Morris International

Estimates by the Australian Government indicate that almost one-sixth of the country’s population smokes cigarettes daily, and that cigarettes have been directly responsible for over 900,000 deaths from 1950 to 2008. ^[2] These damning statistics have forced the government to take an extremely aggressive stance against the tobacco industry. This latest law adds to a long list of anti-tobacco measures adopted, including mass-media campaigns and the promotion of non-combustible tobacco products.

The tobacco companies’ primary concern is that the rulings may spark a flurry of similar laws being passed in other countries, such as the UK, Norway, New Zealand, Canada and India, which have all been monitoring the situation closely. For this reason, we believe that the longer term implications of this development may be much worse for the companies.

Looking forward, we believe that tobacco companies will face many more challenges as governments worldwide take further regulatory measures against the industry and the number of cigarette smokers continues its downward trend. Tobacco companies are now looking at alternative products to generate revenue growth. ^[3]

On a more positive note, Philip Morris recently issued bonds totaling $2.25 billion, taking advantage of low interest rates and positive economic news. ^[4]

We currently have a price estimate of $89 for Philip Morris, which is about 4% below the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Australian court approves tobacco pack logo ban, Reuters, August 2012 [↩]
2. Australia’s Top Court Backs Plain-Pack Tobacco Laws, Bloomberg, August 2012 [↩]
3. Australian Medical Association – Keyword: Smoking [↩]
4. Forward Calender – U.S. Corporate Bond New Issues, Reuters, August 2012 [↩]