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Friday, October 27, 2006

Altria: Smoke Gets In Your Eyes (MO)(KFT)

Almost everyone was happy about Altria's earnings and the fact that it is finally planning to spin out its food operations, Kraft, to shareholders. But, that is not what will drive the tobacco companies fortunes in the future. It is the pending liability suit over "light" cigarettes. The suit could represent a $200 billion risk to the tobacco companies, but they temporarily dodged a bullet as the courts appealed a ruling that plantiffs could have class-action status.

Tobacco suits have been a big problem in the past, but Altria has won the suits brought against it that claimed to have induced people to smoke whily lying about the health risks. The new suits take a different line of attack. They claim that "light" cigarettes were marketed on the premise that they posed fewer health risks to the smoker and that this marketing ploy was not entirely true.

Moody's, the credit rating agency, which has to take the legal environment into account in its ratings of the world's largest tobacco firm has upgraded Altria in the last several days.

Investors can only hope that Moody's is right. The $200 billion at stake is a lot of money.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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