The Globe and Mail

  Do cigarettes, cellphones have something in common?


Saturday, January 20, 2001

Anticipating the effects of litigation can be tricky for even the most astute investors, but as was evidenced this past year, those who chose to enter the murky waters were rewarded by sweet-smelling returns in the tobacco sector. The recent annals of these companies is simple to track.

They were doing exceedingly well, but then they were hit by lawsuits, so investors unloaded the evil weed shares and prices dove. Then voilà, at the point of maximum pessimism when talk is of their demise, their valuations climbed in a beautiful plume.

Is the mobile phone the "cigarette of the ear" or simply a tool to make that huge business deal on one line while yakking with that prospective hot date on another?

The former prospect could cause severe consternation for companies such as Verizon Communications Inc. and Motorola Inc. as lawsuits are starting to pop up based on scientific evidence that these handy, dandy devices lead to ugly stuff such as brain tumours because of their electromagnetic radiation.

There are also indications that cellphones' non-thermal radiation poses a danger. According to research done by Dr. Gerard Hyland and written up in the medical journal, The Lancet, it appears that the under-18 crowd is in greatest jeopardy as their brains are less robust. Yes, it is more serious than simple teen phone addiction.

Of course, on the other side of the ledger, there is contrary scientific research suggesting that these problems aren’t real. Sound smokily familiar?

Use of these devices in cars seems to present a definite hazard. Documentation shows that accidents are far more likely to occur when people use phones behind the wheel. Intuitively it is obvious that when two hands aren’t available to steer, attention is divided, increasing the likelihood of a bang-up. Doubling the jeopardy are scintillating conversations so engrossing that the driver momentarily loses concentration -- an obvious no-no when flying down the freeway. Already cellphones are banned in moving cars in many parts of the world.

But are firms as such liable for these problems? And did they recognize the dangers and fail to inform the public, as the tobacco outfits have been found guilty of? Peter Angelos, a US lawyer who helped win $4.2 billion (US) in damages against the tobacco sector, is about to launch claims against Verizon and Motorola and a number of others. He won’t be the first, as a Maryland neurologist has already filed more than $800 million in suits asserting that his malignant brain tumour was caused by these instruments.

Verizon, the largest US wireline and wireless communication company, is down about 20 percent from its peak last year of $66. Other compelling reasons for this retraction exist. Besides the tech blow-off, the firm still trades at about 4.5 times book value, and its current and debt-equity ratios are nothing to write home about. Given that this business is in a major growth industry and operates in more than 40 countries, the current price-earnings multiple of 14 and change can almost be justified. At least before considering upcoming legal travails.

Motorola, whose primary business is the manufacture and sale of electrical equipment, has dropped by two-thirds to the $20 range. Its financial condition is better than Verizon’s, but the company trades at a p/e multiple near 40, not as ridiculously high as previously, but bloated compared with normal stock valuations. Plus, in 1999, top management twosome Christopher Galvin and Robert Growney amassed more than $30 million in compensation.

How can stocks such as this be played? Well, the enormity of the upcoming legal actions has not been factored into the stock price, indicating that short-term traders might want to look at these companies as potential shorts for a fast, nifty gain. Those of us into longer-term investing will avoid these firms until the upcoming spate of major negativity is in full bloom, when they might become enticing buys.