PAY UP, PHILIP MORRIS!

By Daniel Kadlec

The way tobacco stocks have been smoking lately, you'd think the Surgeon General had just discovered that it's the paper, not what's wrapped inside, that makes cigarettes deadly. In just five months, shares of the nation's biggest tobacco company, Philip Morris (Marlboro), have risen 47% while shares of No. 2, RJR Nabisco (Winston, Camel), have jumped 39%. Sure, the industry just won a slew of important court cases. But that's hardly news. Big Tobacco has been snuffing out liability claims in the courts for decades. What's new is a persistent buzz that some kind of deal is in the works to end tobacco litigation. Such a deal would unshackle tobacco companies from the ball-and-chain view that they might one day be wiped out by a hostile judge or jury. It would free investors to value the prodigious earning power of Philip Morris and RJR like any other company, and send their stocks blazing higher.

Tobacco investors have made it clear how badly they want a settlement. Late last month, for example, rumors swirled about a settlement under which tobacco companies would pay the hefty sum of $10 billion a year--more than the industry currently earns. Philip Morris stock promptly rose $6, creating $5 billion of market value and sending up a smoke signal so dense that even the long-in-denial tobacco industry had to notice. The burning question is this: If the market is ready to embrace such a costly settlement--and antitobacco forces, realizing they're getting nowhere fast in their legal battles, will go for it--how can tobacco executives refuse? Wouldn't a deal be best for everyone? I don't mean to be callous. Clearly there are moral issues here. But let's face it, litigation ultimately comes down to compensation. Nobody sues for a righteous apology.

For now, tobacco executives have the upper hand. Odds are they could go on winning in court for years. But they are just plain wrong to ignore the wisdom of the market. For starters, the $10 billion-a-year figure is a red herring. David Adelman, tobacco analyst at Dean Witter Discover, believes the industry could get the figure down to $3 billion or less. But even at the higher figure, "it's not a lot of money" under certain scenarios, notes Roy Burry, an analyst at Oppenheimer & Co. No industry has greater pricing flexibility, and every nickel-a-pack increase generates $1 billion in annual pretax tobacco earnings. If the industry is worried about gouging customers, shoot, just issue more stock. Wall Street would pay through the nose for a liability-free Philip Morris.

RJR and others have signaled interest in a resolution. Last week Britain's B.A.T Industries bemoaned a 65% increase in its annual legal tab. Big Tobacco pays $600 million a year defending itself. The problem is that as long as the companies keep winning in court, the amount that strikes them as reasonable is not much more than their legal bills. And that's too bad, because now is when they could cut their best deal. The markets, President Clinton and plaintiffs' lawyers all seem eager. It's time to quit blowing smoke and bring this battle to a close.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at kadlec@time.com