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Outlook Dim for Tobacco Earnings
By Amy Collins  Reuters
NEW YORK — Faced with billions of dollars of legal liabilities, shipment declines near 10 percent and higher promotional costs, U.S. tobacco companies this week will report a lackluster first quarter, analysts predict.

Weak profit growth isn't their only problem. Even if Big Tobacco surprises Wall Street with strong earnings, it would not be enough to revive ailing stock values in light of major courtroom losses in recent months, analysts predicted.

"It's sort of out of their hands now. Even if they did report an increased quarter or second quarter, it's going to go somewhat unnoticed because of the litigation risks out there," said Bonnie Zoller analyst of CS First Boston.

First up this week is Philip Morris Cos. Inc., the top U.S. tobacco company and maker of market-leading Marlboro cigarettes, which is scheduled to report earnings Tuesday morning. The No. 1 smokeless tobacco maker, UST Inc., and No. 2 U.S. cigarette producer RJR Nabisco Holdings Corp., maker of Camel, Winston and Salem cigarettes, will report later.

Among the prime factors holding down tobacco makers' bottom lines is legal costs, analysts said.

In November, the tobacco industry reached a $206 billion settlement with the states to settle tobacco-related health claims. A similar claim is in the works at the federal level and several hundred suits have been filed by individual smokers. To start covering those costs, the tobacco companies raised prices a record 45 cents per pack, but then diluted the benefit of the increases by spending more on costly promotional programs.

That impact will linger "the rest of the year," said Jim Brucculeri, the U.S. tobacco analyst at Merrill Lynch.

But Salomon Smith Barney tobacco analyst Martin Feldman predicted the deep discounts Philip Morris offered for five weeks will have paid off in higher market share.

Whereas the entire industry faces a shipped volume decline of 9.5 percent, Feldman said, it is likely to be only 8 percent for Philip Morris, but as high as 14 percent for RJR.

"It hurts a little bit in the quarter, but long-term, it's very good for earnings," Feldman said of the discounting.

Wall Street is expecting Philip Morris to report operating earnings of 80 cents per share, compared with 79 cents a year ago, according to First Call, which tracks analysts predictions.

RJR is expected to report 28 cents, compared with 52 cents a year ago, its fifth straight decline in quarterly profits. RJR, which is in the process of selling its international tobacco operations to Japan Tobacco Inc., is also planning to spin-off its domestic tobacco operations to shareholders while retaining its Nabisco food operations.

Analysts predicted the international economies, from the decline in the euro, to economic woes in Russia and Asia, would also drag down international profits.

Philip Morris said in February it would take a $200 million charge in the first half of 1999 related to the phasing out of cigarette production at its Louisville, Ky., plant and cuts of as many as 1,400 jobs. A Philip Morris spokesman declined to say if that charge would appear in the first or second quarter.

Feldman predicted that Kraft Foods, the foods division of Philip Morris, is likely to see margin gains in its domestic operations above 18 percent. He said the growth has come across the board and has been aided by continued cost cutting.

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