Why Do They Admire Philip Morris?

Beauty is in the eye of the beholder. Philip Morris, the tobacco, food and beer company, emerged as one of America's most admired corporations in this year's list in Fortune magazine, giving Merck & Co., the pharmaceutical maker, a close run for first place.

Philip Morris' strong points, according to Fortune--which surveys 8,000 corporate executives, directors and financial analysts for its rankings--are quality of management, value as a long-term investment and ability to attract, develop and keep talented people.

But the magazine mentions only in passing an obvious negative. Philip Morris is the leading producer of cigarettes--Marlboro, Benson & Hedges, Virginia Slims, and Merit, among other brands. And there are many Americans who don't think that cigarettes are admirable, including the U.S. government, which requires warnings on packages that say, "Smoking causes lung cancer, heart disease, emphysema and may complicate pregnancy."

How can a company that makes and sells such products be admired? Simple; for its business ability. Indeed, Philip Morris' very adroitness in diversifying away from cigarettes wins it compliments in Fortune.

It's not that corporate types are oblivious to morality. It's just that American society--so far--has found the moral question of cigarettes to be one of personal choice. Court decisions in liability lawsuits against cigarette makers have found that smokers have been warned of the danger and proceed at their own risk. Smoking, although increasingly restricted in public, is lawful.

However, lawsuits on different legal arguments could result in what, in effect, would be a ban on smoking in the coming decade.

Which makes Philip Morris a particularly fascinating company at the moment--because in more ways than one it reflects trends to watch in the 1990s.

One trend is straightforward: Companies favored as investments in the '90s, say experts, will be those that consistently produce rising profits, as opposed to the takeover plays that dominated market attention in the 1980s. Even now, word is spreading about Philip Morris--brokers calling clients to talk about it, prominent investment managers such as Peter Lynch of Fidelity Magellan Fund, listing it among "companies whose earnings are going to keep growing over the next three to five years--and that's what matters."

But Philip Morris also reflects another trend: a change in attitudes about the social responsibility of business that veteran Wall Streeters say could question corporate policies in the '90s. Significantly, tobacco companies may face new and different legal challenges. Some legal experts say a federal appeals court decision in Newark, N.J., just over a week ago opens the way for lawsuits on the inherent dangers of smoking. If juries find that the dangers of smoking outweigh its usefulness, then personal choice is not a question. Cigarettes could be outlawed, and there is even a possibility that producers could be held liable for damages--as Johns-Manville Corp. was held liable for the damages of asbestos.

The cigarette, a product of the 20th Century, may not make it to the 21st. But Philip Morris probably will.

It's a smart outfit, one that in some ways other U.S. companies could study. It's highly competitive. A distant sixth in the industry 25 years ago, Philip Morris decided that if cigarettes were legal, it would make the best of it. It invested in advanced manufacturing equipment, became the low-cost producer and the leading U.S. tobacco company in the 1970s--passing R. J. Reynolds.

By persistent efforts over two decades, Philip Morris built sales in foreign markets--where people smoke more than Americans now do and the cigarette trade is often dominated, as in Japan and France, by a government-sanctioned monopoly.

"It pays its suppliers promptly and its people well," says a former Philip Morris executive.

But perhaps most important, Philip Morris in the past five years has transformed itself, dramatically reducing its dependence on cigarettes. In 1985, it acquired General Foods (Maxwell House coffee, Post cereals, Jell-O), and it bought Kraft Foods (cheese, mayonnaise) in 1988. Where tobacco gave Philip Morris 70% of sales and 90% of operating profit five years ago, in 1989 food contributed 52% of sales--which totaled roughly $45 billion--and 30% of the more than $7 billion in operating income.

And food will surpass tobacco as the principal source of profit within the next four years, says analyst Barry Ziegler of CL Global Partners, U.S. investing arm of the French bank Credit Lyonnais. All through the early '90s, says Ziegler, earnings will grow 15% to 20% a year.

The upshot, say some analysts, is that with one more food company acquisition a few years from now, Philip Morris may be able to kick the tobacco habit altogether. Given the trend of public opinion and new possibilities in litigation, that would be the smart thing to do. And though some may find it impossible to admire a maker of cigarettes, Philip Morris is a smart company.

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