The Tobacco Sector's Latest Setback

The tobacco sector is a giant. It spends approximately $10.5 billion a year on marketing and advertising in order to keep 20% of the American public smoking. This isn't to say it doesn't acknowledge the harmful effects of smoking, or that it ignores the growing number of smoking dissidents campaigning against them; it's just that I equate this situation to poking a dinosaur with a twig.

Well, the twig just got a little bigger.

The Centers for Disease Control and Prevention on Thursday unveiled a three-month, $54 million campaign whereby it will, through billboards, print, online, radio, and television ads, use stark imagery to showcase the effects of smoking. This is the first time the CDC has taken its advertising campaign to television but definitely isn't the first time anti-smoking advocates have used a shock-and-awe message to get users to listen.

In the early 2000s, the American Legacy Foundation's "truth campaign" was largely credited with decreasing the number of younger smokers.

The overall goal of the advertisements is to shrink the smoking base by about 50,000. It's estimated that over the next three years, more than $170 million in medical costs will be saved by this campaign.

For Big Tobacco, it represents just another blow in their endless legal battle against the United States' stringent laws. Luckily for Big Tobacco, a plan that would have required nine graphic images that detailed the effects of smoking to be placed on cigarette packs was deemed unconstitutional last month. But that doesn't mean U.S. tobacco stocks are out of the woods.

Altria (NYS: MO) , a company I have derided for months now, has laid out plans to reduce its workforce by 15% in response to declining sales. Its flagship Marlboro brand saw volume decline by 0.6% in the fourth quarter as it continues to be undermined by discount brands.

Following suit, Reynolds American (NYS: RAI) last week announced it would be reducing its workforce by up to 10% by 2014 in order to cut costs and maintain profitability levels. The company did say the majority of those leaving were doing so of their own free will. Yay, I guess?

Even Vector Group (NYS: VGR) , which primarily caters to discount brands, witnessed its unit volume decline in the fourth quarter and only grew sales by implementing price increases. The other concern for a company like Vector is its small cash position. Being smaller is not always a disadvantage, but in a sector where lawsuits are a fact of life, possessing just $317 million in cash just doesn't seem like enough.

I've said it before and I'll say it again: If you want to play the tobacco sector, the only smart move is to look beyond the strict laws of the United States. Philip Morris International (NYS: PM) may not offer the sexiest dividend of the bunch, but its revenue stream is considerably safer, and its legal team far less active, than its U.S. partners. If you're heart's set on looking within the U.S., Lorillard (NYS: LO) appears to be the strongest play at the moment. It's practically the only domestic tobacco producer with increasing cigarette volumes.

As usual, it's going to be interesting to see how this campaign plays out. From a personal, nonsmoker perspective, I wish it tons of success, but we'll just have to check back on these stocks in the fourth quarter at the earliest to see whether it truly had an impact.

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Am I blowing smoke or do domestic tobacco producers have a reason to be worried? Share your thoughts in the comments section below with your fellow Fools, and consider adding these five tobacco names to your free and personalized watchlist.

At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He strongly believes in donating to cancer research and encourages you to do the same. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Altria and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's never the butt of jokes.

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