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Two analysts and top management from three sector firms examine the Tobacco sector in this special 22-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info408.htm.

TWST: Let’s begin with the Boeken case and the latest round of tobacco-related litigation. How was $5 million plus $3 billion in punitive damages arrived at?

Ms. Herzog: Basically, the jury came back and awarded Mr. Boeken that amount. They believed that it was justified in their opinion. Since the negative verdict, Philip Morris has filed a motion to get this case thrown out, arguing that the jury was acting with passion and prejudice, and that’s not legal. Then last night the judge decided to reduce the punitive damage award from $3 billion to $100 million. This decision hit the market today, and my call on this is that I think it’s a step in the right direction, although it was not ideal. I continue to recommend purchase of Philip Morris (NYSE:MO) and believe its valuation is very attractive. In a worst-case scenario the stock could trade in a tight trading range, but as a shareholder you will get paid to wait until the stock goes back up in the form of a very attractive dividend yielding close to 5.3% once the company increases it on August 29.

TWST: Nevertheless, the $100 million, a figure that the judge has said is appropriate, is still an enormous amount of money.

Ms. Herzog: It’s still 18 times compensatory damages, and if you look in California, there is no opinion that has ever upheld a punitive damage award greater than $25 million. Furthermore, in the California appellate system, there’s never been an approved punitive damage award greater than 3 times the amount of compensatory damages. And remember, this is 18 times, so it’s still too high. Philip Morris will appeal this decision, and they’ll appeal to get the case thrown out. So either on appeal this award gets reduced further, or the best situation is that the case just eventually gets thrown out.

TWST: What does the “passion and prejudice” attributed by Philip Morris to the jury reflect?

Ms. Herzog: Philip Morris, in particular, has had some issues in California, and that’s not a secret. That’s been going on since the first trial was lost. Clearly, it’s a plaintiff-friendly state, and it’s been very difficult for them to win a case. It has caused some concern in the marketplace, and until we see that trend reversed, I think there might be investor caution with regard to that type of litigation in California. There’s been litigation going on over the last 40 years throughout the US, and the last few losses have really been in California. And so while there are pockets of the US where Philip Morris or the industry has not been as successful, for the most part, they have been very successful. If you look at the last 25 individual cases, the industry has won 20 of them. So the track record is still incredibly favorable and, furthermore, they have never paid out any money to a plaintiff (other than Brown & Williamson in the Carter case). We’ll have to wait and see if that will always be the case. I’d like to think it will, because if the law is followed, they will be successful in the long run.

This special issue includes:

1) Tobacco Stocks - In an in-depth (4,400 words) Analyst Interview, David Adelman, Principal at Morgan Stanley Dean Witter, examines the outlook for the sector and shares specific stock recommendations.

2) Outlook for the Tobacco Industry - In an in-depth (3,800 words) Analyst Interview, Bonnie Herzog, Vice President at Credit Suisse First Boston, examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of three sector firms examine the outlook for their firm and the sector.