Will A States Refund for Tobacco?

The New York Court of Appeals on Thursday ruled tobacco companies who are part of the 1998 agreement that settled tobacco litigation with most states can go to arbitration to try to reduce their settlement payments. The $246 billion Master Settlement Agreement required tobacco companies to make annual payments to the states and also placed restrictions on how cigarettes are marketed but, if the tobacco companies that signed the agreement lose market share because of those restrictions, they are entitled to a refund of payments.

"It's clearly spelled out in the Master Settlement Agreement that a dispute over a payment, which this is, should be resolved through binding arbitration," said David Howard, a spokesman for R.J. Reynolds who has spearheaded tobacco's fight for reimbursement. Altria had no comment.

Thursday's ruling, which is in line with decisions by other state courts, means the tobacco companies can now try to reduce their 2003 payments through arbitration.

An auditor previously found in March 2004 that the companies who signed the settlement lost market share in 2003 and determined restrictions from the agreement were "a significant factor contributing to this loss".

Among the companies that signed the master Settlement Agreement are Altria (MO) and Reynolds American (RAI) although neither was part of Thursday's litigation.

One of two things will end up happening. Either the states will have to fork over hundreds of millions of dollars back to tobacco companies, monies that they just do not have or, the Master Settlement will be redone to both assure market share for it's signers, and further insulate the industry from future litigation. The second is the most likely scenario as states are pitifully dependent on the tobacco monies and simple to not have the fiscal ability to part with it. Assuring market share gives growth back to the signers and a more ironclad agreement cements their stranglehold on the industry.

Altria is letting today's plaintiffs, Commonwealth Brands, King Maker Marketing and Sherman and do it's dirty work while it plays good corporate citizen by supporting the FDA's potential regulation of cigarettes. The best part is? They are not only willing to do it but they are winning. Altria can rides their coat tails, avoid the legal expenses associated with it, and reap the rewards.

I simply cannot remember a time in which the litigation environment surrounding tobacco was this good.

McDonald's Sales UP!

McDonald's (MCD)Chief Executive Officer Jim Skinner remarked, "May marks another month of strong sustained sales and shows how well we are providing solutions for today's busy lifestyles, with the convenience and value that customers expect from McDonald's. The chief reason given for the US business growth? Breakfast, or as I spell it c-o-f-f-e-e. Is Starbucks (SBUX) CEO Jim Donald paying attention now?

After their last earnings announcement, in an interview on CNBC, Donald said "we do not really consider or discuss our competition." He'd better start. They are stealing his business. Attracting only 1% more people per quarter will not fuel the long-term growth rate of 21.9% that analysts expect.

When you compare Starbucks recent quarter with today's statement by McDonald's Skinner who said, "We've re-energized our worldwide business with new food choices, redesigned restaurants and relevant marketing. Around the world, demand for McDonald's continues to grow as we now serve 6 million more customers every day than we did in 2002. We are working to attract more customers, more often, through innovation, added convenience and greater menu choices."

This upcoming quarterly announcement by Starbucks will be very interesting. They are officially entering the "reduced comps" phase. This means that when they are comparing quarterly sales growth, the comparisons they are going up against now become easier as this quarter marks the beginning of the recent slide. It also coincides with the improved coffee offering at McDonald's, but do not expect to hear that on the call.

While McDonalds is consistently blowing away improving numbers, Starbucks investors are hoping to beat diminishing ones. Not good. I am expecting bad news for investors this quarters and look forward to whatever excuse management comes up with. Last quarters anemic numbers were excused away as being "up against a tough comparison". Now that the comparisons are getting dramatically easier, we need to take that one off the table.

Should be quite interesting..