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We reiterate our outperformratings. While next week's Senate floor vote to back a modified McCain bill will likely leave many
investors feeling queazy, we believe everyone should keep sight of the fact that Senator Majority Leader Lott is working off the
strategy that the tobacco issue has to be resolved earlier rather than later, and that the best outcome for all parties would be a briokered
deal led by the White House, with the industry's support in a House-Senate conference. While this outcome has not always been
clear to us, it has become our favorite now after watching yesterday's orchestrated Sdneate Finance markup, as conservative Senators
simply threw up their hands and smiled it became clear that Lott's behind-the-scenes efforts were to force the McCain billon to the
Senate floor early next week, before the Nickles' "pro-tobacco" faction could introduce -- and get 60 votes for -- their own skinny
tobacco/drug bill. While stocks may continue to underperform into next week's Senate vote, we believe investors should stay the
course, given our view that this course to a comprehensive tobacco deal is probably prefereable to passage of a skinny tobacco bill to
get the inherenct values out of the tobacco stocks, and our conviuction that Senator Lott will hold out the money from any tobacco bill
to force Clinton to give the industry the two things it needs to separate tobacco from non-tobacco assets -- an unconditional cap, and
some provision that makes clear that coporate parent assets would be off limits if the domestic tobacco subsidiaires went bankrupt..
This, we belevie, would give the Boards of Directors the protection they need to spin off tobacco or non-tobacco parts without fear of
fraudulent conveyance risks. Our 6-12 month price targets remain MO $60 (80% relative), RN $40 (sum of the parts - Nabisco and
RJR International), and UST (70% relative).
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