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    "ocrText": "05/08/98 FRI 17:12 FAX 2022607425\nOASH\n003\nMcCain's Achilles Heel--Treasury Numbers Don't Add Up\nhttp://www.tobacco.org/News/98.5blackrepor/98.5blackreport.html\nto fund the deal.\n7.\nWe rate Philip Morris (price target $60), RJR Nabisco ($40), and UST ($40) outperforms. A $5.5\nbillion settlement in Minnesota, combined with a less onerous McCain bill with an explicit\nprovision that limits liability to domestic tobacco, could dramatically improve sentiment toward\nstocks. New Wilner trial (Maddox vs. B&W) begins next week in Florida (3-4 weeks).\nADDITI ONAL DETAILS\n1. Treasury numbers don't add up. After pending considerable time trying to convince anomists at the Tre asury Department\nthat the r analyses of the proje cted effects of the Cain bill on industry volumes, cigarette prices, industry operatingprofits, and\nyouth smokingrates were wrong, we have come to the conc lusion that industry analysis andthe The asury nt talking the same\nlenguage. Based onther assumptions, Senator Mc Cam and Treasury officials can, with struightfaces, say that the per pack\nprice increase nee ded to pay for the incremental costs of the M Cain is $1.21/pack, while the industry andmost Wall Street\nmalysts have testified a written that the price increase would be twice that. To tridge the language barrier between the two\nBenford Bernstein & Co. Inc. 767 Pirth Avenue New Yo NewYor 10153 212M56-5500\nThe information act forth has been obtained from sources we believe to be reliable but is not guaranteed by us and may be incomplete. Such information and any views or opinions\nexpressed herein are not to be considered as representations by us or as a prospectus or offer to buy or sell any security, Investment information supporting a recommendation of &\nspecific security or materials upon which a projection or prediction are based are available upon request. Sanford C. Bernstein & Co., Inc. (the \"Corporation\") or one or more of its\nclients. officers. directors. stockholders, affiliates or employees may At any time hold, increase or decrease positions in securities of any company mentioned herein. The Corporation\nmay provide investment management or other services for such companies or employees of such companies or their pension or profit sharing plans. Detailed\nBernetein Research\nPage 2\nsides, we have reworked our industry volume and profit analysis of the McCain bill to distinguish\nbetween the endogenous effects (those arising from the bill itself) and the exogenous effects (those\nthat occur whether or not there is a bill).\nWe agree with the Treasury economists that one should consider only the incremental, or\nendogenous effects on price in costing out the McCain bill. Our analysis of the price rise needed\nto pay for the McCain bill now excludes ongoing state and federal excise tax increases, trade\nmarkup trends, and normal industry price increases all which would occur with or without a\ndeal. But even excluding these outside factors, we estimate the industry will have to increase list\nprices by $2.78/pack in constant dollars over five years to cover all the incremental provisions in\nthe McCain bill. This, we believe, would trigger a massive black market unlike anything we have\nseen in this country, given current prices in Mexico of $1.00/pack, and average gray market\nMarlboros and other U.S.-made cigarettes sold on Indian reservations for $1.20/pack. Within five\nyears, we estimate the average real price of a pack of cigarettes will be $5.06/pack up from the\n$2.00/pack benchmark at the end of 1998 used by Treasury. In contrast, Treasury economists estimate\nthat the price increase in constant dollars over five years will be $1.21/pack, and that the average price\nfor a pack of cigarettes in five years will be $3.21 -- a $1.85/pack difference vs. our estimates.\nWe have summarized the apparent differences between our analysis and Treasury's analysis in the\nfollowing table. We cannot be 100% certain of the differences between our model and Treasury's,\nbecause Treasury officials, despite three months of pleading, refuse to provide us with anything\nmore than a one-page \"model\" that contains five lines of summary information.\n2 of 6\n5/8/98 5:41 PM"
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