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Star Scientific and Reynolds American Focus on New Tobacco Trends  

Tobacco stocks have been relatively flat in 2012 as the industry continues to negotiate strict regulations pushed by governments across the world. Tobacco manufacturers continue to focus more attention on their respective smokeless tobacco segments to offset the decline in cigarette demand. Thus far, this has benefitted margins industrywide. Five Star Equities examines investing opportunities in the tobacco industry and provides equity research on Star Scientific, Inc. (NASDAQ: CIGX - News) and Reynolds American, Inc. (NYSE: RAI - News). Access to the full company reports can be found at:

www.fivestarequities.com/CIGX www.fivestarequities.com/RAI

Global Industry Analytics, Inc. (GIA) recently issued a report, "Tobacco: A Global Outlook," arguing that dropping consumption of tobacco products across developed economies has prompted tobacco companies to augment their focus on developing markets, "which have been exhibiting positive trends." Moreover, GIA says that new Low Tar Cigarettes are expected to do well in the market with the industry being optimistic to "sail through" the disturbing phase.

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• Sale of vast Reynolds Tobacco collection begins Friday 

Talk about a garage sale to beat all garage sales.

R.J. Reynolds Tobacco Co.'s 7,000-piece collection of artwork, pottery, books, antiques and collectibles from its offices all over the world goes on sale Friday through Sunday to benefit the Arts Council of Winston-Salem and Forsyth County.

Items range from small ceramics for $10 to $20 to large items such as grandfather clocks for $3,000. Reynolds acquired the pieces over more than 100 years and donated the collection to the arts council, which will use the proceeds for grants and programs.

"One of our main goals at the arts council is to put it into the community again, so it's priced for that," said Rebecca Parker, who has been cataloging the vast collection since May in preparation for the sale. . . .

"It's a once-in-a-lifetime opportunity," New said. The sale gives people a chance to buy a piece of local history and support the local arts community at the same time.

Much of the collection is antique. There are large sculptures, brass nautical items and a statue of a young man lighting a pipe. There are newer things, too. Many of the oil paintings, prints and photographs appear to date to the 1970s and '80s, Parker said.

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Form 8-K Current Report Filed Feb 8, 2012 

Reynolds American Inc. (NYSE: RAI) today announced fourth-quarter 2011 adjusted EPS of $0.72, up 12.5 percent from the prior-year quarter on the strength of higher pricing and productivity improvements. Adjusted results exclude non-cash charges of $0.05 per share for trademark impairments and $0.15 per share for mark-to-market adjustments for pension and postretirement plans. Fourth-quarter reported EPS was $0.52, up 15.6 percent.

For the full year, adjusted EPS was $2.81, up 6.8 percent, while reported EPS was $2.40, up 25.0 percent. Full-year adjusted results exclude trademark impairments, mark-to-market adjustments for pension and postretirement plans, accruals for four Engle progeny lawsuits, the Scott lawsuit charge, implementation costs, tax items, and 2010 charges for goodwill impairments, plant closings, federal health-care changes and Canadian governments’ settlements. Both fourth-quarter and full-year results reflect the impact of the sale of Lane, Limited in early 2011.

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RAI delivers solid earnings growth in 2011; Company expects adjusted EPS growth in mid- to high-single digits for 2012 (PDF) 

Fourth Quarter and Full Year 2011 – At a Glance

 Adjusted EPS: Fourth quarter at $0.72, up 12.5 percent; full year at $2.81, up 6.8 percent

o Results exclude non-cash trademark impairments, mark-to-market adjustments for pension and postretirement plans, and other special items*

 Reported EPS: Fourth quarter at $0.52, up 15.6 percent; full year at $2.40, up 25.0 percent

 RAI issues 2012 guidance: EPS range of $2.91 to $3.01  Operating company highlights:

o R.J. Reynolds increases adjusted operating income and margin o American Snuff grows volume and share o Santa Fe delivers double-digit volume and earnings growth

 RAI increased dividend, initiated share buyback program in 4Q11  RAI delivered total shareholder return of 34.4 percent for 2011

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American Snuff in Memphis sees smokeless tobacco volume increase 

Tobacco company Reynolds American, parent of American Snuff in Memphis, says fourth-quarter profits rose 16 percent as higher prices and productivity gains helped offset declining cigarette sales.

The nation’s second-biggest tobacco company today reported net income of $304 million, or 52 cents per share, for the period ended Dec. 31.

That’s up from $262 million, or 45 cents per share, a year ago. Adjusted earnings were 72 cents per share.

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FORM 8-K CURRENT REPORT 

At a meeting held on February 2, 2012, the independent members of the Board of Directors, referred to as the Board, of Reynolds American Inc., referred to as RAI, based upon a recommendation from the Compensation and Leadership Development Committee of the Board, referred to as the Compensation Committee, approved (1) the performance period of January 1, 2012 through December 31, 2012 for the 2012 annual incentive awards to be made under the Reynolds American Inc. 2009 Omnibus Incentive Compensation Plan, referred to as the Omnibus Plan, for certain executive officers, and (2) the performance formula for determining the award pool for the annual incentive awards under the Omnibus Plan for such one-year performance period for each of these executive officers. Under the formula, the award pool for the annual incentive awards for each of the following executive officers will be determined based on the following percentages of RAI’s cash net income for the performance period: Daniel M. Delen, 0.40%; Thomas R. Adams, 0.20%; and Tommy J. Payne, 0.20%. Susan M. Ivey and E. Julia Lambeth, the other named executive officers listed in RAI’s 2011 definitive proxy statement, left RAI at the end of February 2011 and December 2010, respectively, and therefore did not receive 2012 annual incentive awards. For purposes of determining such award pools, cash net income is defined as net income from continuing operations in the consolidated statement of income adjusted for the impact of non-cash items, such as depreciation, amortization, unrealized gains and losses, intangible asset impairments and other non-cash gains/losses included in net income, as reported in RAI’s 2012 audited financial statements contained in its Annual Report on Form 10-K for the fiscal year ending December 31, 2012.

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RAI board declares quarterly cash dividend (PDF) 

Feb. 2, 2012 – Reynolds American Inc. (NYSE: RAI) announced today that its board of directors declared a quarterly cash dividend on the company’s common stock of $0.56 per share ($2.24 per share annualized).

The dividend will be payable on April 2, 2012, to shareholders of record on March 9, 2012.

This is the 31st consecutive quarterly cash dividend that Reynolds American has declared since it became a public company on July 30, 2004.

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• Plaintiffs Win Again in Engle Progeny Tobacco Cases 

On January 26, 2012, an Escambia County jury awarded Erskin Donal Ward $2.7 million against R.J. Reynolds Tobacco Company and Liggett Group, LLC Philip Morris USA, Inc., in case number 2008-CA-2135, filed in the First Judicial Circuit, in Escambia County, Florida.

The lawsuit filed in the case alleged that Erskin Ward's wife, Mattie Emma Ward, died of emphysema after nearly 50 years of smoking cigarettes made by R.J. Reynolds Tobacco Company and Liggett Group, LLC Philip Morris USA, Inc.

Erskin Ward's attorney, James Gustafson said that the jury verdict included $1.7 million in punitive damages against R.J. Reynolds Tobacco Company. . . .

"The jury's work and patience in this trial showed," Gustafson said. "The verdict is not only a tribute to a woman who was a treasure to Pensacola and the special education community, but to the hard work the jury did to understand how much things have changed in the past 50 years--and the need to punish R.J. Reynolds for its intentional outrages, what they did to a generation of Americans, including hawking cigarettes to children.'

"Mrs. Ward is another tragic example of the best among us, someone who started smoking as a child decades before the warnings, and was killed by addiction to nicotine," said Gustafson.

Sources at the Searcy Denney law firm said that this verdict marks eight successive plaintiff's verdicts in Engle progeny tobacco suits

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• Durbin, Senators to FDA: Deceptive Marketing of Cigarettes Must be Stopped  

U.S. Senator Dick Durbin (D-IL) today joined Senators Frank R. Lautenberg (D-NJ), Tom Harkin (D-IA), Sherrod Brown (D-OH) and Richard Blumenthal (D-CT) in calling on the Food and Drug Administration (FDA) to crack down on marketing by cigarette companies that misleads consumers about the safety of their products. Cigarette companies have adapted their advertising and marketing practices to skirt restrictions signed into law in 2009 and the FDA must take action, the Senators wrote in a letter to FDA Administrator Margaret Hamburg.

"In the absence of clear regulations, cigarette companies continue to deceptively market their products, misleading consumers about the health consequences that come from smoking," the Senators wrote.

In 2009, Congress passed landmark legislation that prohibited using descriptors in cigarette labeling--such as "light," "mild," or "low-tar"--that insinuate or imply that certain products are healthier or lower risk than regular cigarettes. Research has definitively shown that, although smoke from "light" cigarettes may feel smoother or lighter on the throat and chest, these cigarettes are not less harmful than regular cigarettes.

A copy of today's letter is pasted below: . . .

" In the absence of clear regulations, cigarette companies continue to deceptively market their products, misleading consumers about the health consequences that come from smoking. For example, American Spirit Cigarettes, made by Reynolds American subsidiary the Sante Fe Natural Tobacco Company, claim to be "natural" and "organic," implying that these cigarettes are better for smokers' health. Likewise, Philip Morris Company sells Marlboro Smooths as well as Virginia Slims, whose names have similar "healthy" connotations. Additionally, companies use colors to suggest that some cigarettes are safer. Marlboro now uses Gold and Silver as code for "light" and "ultra light." Recent research has shown that approximately 20 percent of smokers falsely believe that some cigarette brands can be less harmful than others and many smokers assume different colored packages contain less harmful cigarettes.

"Cigarette companies have adapted their marketing and continue to deceive consumers. We urge FDA to protect the public's health by prohibiting misleading cigarette marketing and issuing guidance defining and prohibiting the use of "similar descriptors."

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MINOR: Cigarette, anyone? Think twice  

For the last three weeks my whole world has been the inside of a courtroom, the Circuit Court of Highlands County. I was impaneled on a jury for a wrongful death case . . . .

As recently as 1999, tobacco company CEOs stood before the U.S. Congress and swore under oath that they did not believe cigarettes cause lung cancer, nor that they are addicting. But their own company documents, subpoenaed by Congress, proved the opposite.

As a jury, we deliberated a long time about fault and about damages. To reach an agreement, we all had to make some concessions. . . .

When it was all over, I was relieved. Yet when I got home that final day, I sat down and cried for four hours straight. At first I thought it was just the release of stress, but now I'm not so sure. I know I cried for the lady who died, and for her children and grandchildren who miss her. She could easily have lived 15 to 20 years longer than she did.

I also cried for all the mothers and dads around the world who still smoke and want to quit but find themselves addicted, lifetime victims of an industry that doesn't care.

I also cried for my own brother who has smoked all his life and now suffers from severe heart disease, COPD, and recurring pneumonia. It simply did not have to be this way.

Finally, I cried for the tobacco company executives and scientists, and their lawyers, who continue to make a lucrative living off the pain, suffering, and death of their fellow Americans. There is no justification for such callous, mercenary selfishness.

Shame on them all.

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When it was all over, I was relieved. Yet when I got home that final day, I sat down and cried for four hours straight. At first I thought it was just the release of stress, but now I'm not so sure. I know I cried for the lady who died, and for her children and grandchildren . . . I also cried for all the mothers and dads around the world who still smoke and want to quit . . . I also cried for my own brother who has smoked all his life and now suffers from severe heart disease, COPD, and recurring pneumonia. . . . Finally, I cried for the tobacco company executives and scientists, and their lawyers, who continue to make a lucrative living off the pain, suffering, and death of their fellow Americans. There is no justification for such callous, mercenary selfishness. Shame on them all.
Hallgren juror Joyce Minor.

ALEC and the Tobacco Industry  

The American Legislative Exchange Council (ALEC) is an influential, under-the-radar organization that facilitates collaboration between many of the most powerful corporations in America and state-level legislative representatives. Elected officials then introduce legislation approved by corporations in state houses across the U.S., without disclosing that the bills were pre-approved by corporations on ALEC task forces.

ALEC has had a long relationship with the tobacco industry. . . .

ALEC's relationship with the tobacco industry started after 1979, when ALEC Executive Director, Kathleen Teague, first wrote the Tobacco Institute seeking financial support. Shortly after, Institute members started participating in ALEC events. The industry's relationship with ALEC showed its worth quickly after ALEC provided Tobacco Institute members with face-to-face access to highest-level federal elected officials. In 1981, Tobacco Institute President Samuel Chilcote accepted an invitation to attend an ALEC "Exclusive White House and Cabinet Briefing" meeting with none other than the president of the United States, Ronald Reagan and his cabinet. . . .

ALEC has taken the cigarette makers' side in virtually every debate between the industry and public health. A 1987-89 R.J. Reynolds strategic plan describes ALEC as an ally who could help "create an atmosphere of tolerance and fairness in the public's attitude toward smoking and smokers." RJR considered ALEC a friendly group of elected officials who would be willing "to tell our story in such a manner that it becomes their [other legislators'] position."

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Verdict favors smoker estate 

On Tuesday evening, a Highlands County jury returned a $2 million verdict for the Hallgren family in a lawsuit against Phillip Morris and R.J. Reynolds tobacco companies.

The trial continued Wednesday and Thursday, said Clerk of Courts Bob Germaine, with the jury awarding $750,000 in punitive damages. . . .

"The main focus is on Florida," said Edward Sweda Jr., senior attorney with the Tobacco Products Liability Project at Northeastern University Law School in Boston.

Juries have found for the plaintiffs in two-thirds of the cases. "There is a large focus on the smoker's conduct," Sweda said. "Either they didn't listen to or follow the advice of their doctors. If the juries primarily focus on that, a defense verdict results.". . .

The Sebring jury found that Claire Hallgren was addicted to cigarettes, which was the legal cause of her lung cancer and death. Both Phillips Morris and R.J. Reynolds were negligent, and the jury found that cigarettes were defective and unreasonably dangerous.

The defendants concealed or omitted material information about the health effects or addictive nature of smoking, the jury found.

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• RJ Reynolds And Phillip Morris To Pay $2.5 Million In Damages 

SEBRING, FL - The first major tobacco lawsuit of 2012 ended yesterday with RJ Reynolds (NYSE: RAI) and Philip Morris (NYSE: PM) being ordered to pay a combined $2.5 million in damages to a deceased smoker's surviving husband.

Following nearly three-weeks of trial testimony a Highlands County jury found the two tobacco companies responsible for the smoking-related lung cancer of Theo Hallgren's late wife, Claire Hallgren.

After determining Claire Hallgren was 50% responsible for her addiction and awarding $2 million to Theo Hallgren in compensatory damages, the jury went on to order RJ Reynolds and Philip Morris to pay $750,000 each in punitive damages. . . .

During closing arguments attorney T. Hardee Bass, of the firm Searcy Denny, told jurors in light of the tobacco company's current billion-dollar profits, they needed to send a strong message with a large verdict. "That's what this morning is about, punishment," said Bass. "Punishment for the harm they caused to Claire Hallgren."

Representing Philip Morris, attorney William Geraghty of Shook Hardy Bacon told the jury the company had made massive, systemic changes since the 1950's, when tobacco products were marketed more aggressively. FDA regulation and Philip Morris' own practices meant they had already taken enough corrective action. Dal Burton of Womble Carlyle, representing RJ Reynolds, said his client had also eliminated practices from the "1930's and 40's that are today an anathema."

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Magistrate Judge Appointed in Star Scientific Patent Infringement Lawsuit Against RJ Reynolds 

Star Scientific, Inc. /quotes/zigman/80562/quotes/nls/cigx CIGX +35.78% received an Order today from the US District Court for Maryland that refers the company's patent infringement litigation against RJ Reynolds Tobacco Company (RJR) to the Honorable Beth P. Gesner, US Magistrate Judge, for possible settlement. The Order of Reference was signed by Judge Marvin J. Garbis, who has overseen the litigation since August, 2004. Paul L. Perito, Esq., Star Scientific Chairman and President, commented, "We are pleased that after ten years of hard-fought litigation -- where both sides seldom agreed on issues -- the Court's decision to refer the litigation to a Magistrate Judge for settlement purposes was agreed to by the parties. We believe this augurs well for good faith negotiations by the parties that hopefully can lead to a mutually acceptable global resolution."

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• CORRECTED-UPDATE 1-Star Scientific, Reynolds American to explore patent settlement  

Star Scientific Inc, a maker of smokeless and dissolvable tobacco products, said a federal court referred its patent infringement case with a unit of Reynolds American Inc to a magistrate judge for possible settlement.

The news sent Star Scientific's shares up as much as 39 percent in afternoon trade on the Nasdaq.

The lawsuit concerns two of Star Scientific's patents on tobacco-leaf curing methods that claim to prevent the formation of cancer-causing chemicals during the process.

"We are pleased that after ten years of hard-fought litigation -- where both sides seldom agreed on issues -- the Court's decision to refer the litigation to a Magistrate Judge for settlement purposes was agreed to by the parties," Star Scientific Chairman Paul Perito said in a statement.

A Star Scientific spokeswoman told Reuters that this did not mean the companies were close to a settlement. However, both parties would explore whether there is a basis for discussion and resolution of the dispute, she said.

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