(FORTUNE Magazine) – Okay, so Philip Morris's stock is a captive of litigation. Good legal news sends shares up; bad news leads to losses. Investors seem unconcerned about the company's actual business. Instead they're worried that huge legal liabilities could be the undoing of the tobacco industry, just as they were with asbestos makers and, more recently, makers of silicon breast implants.

Sounds scary, right? The buzz now is about several landmark cases set for trial this spring and summer. Some people are calling the next six months the most critical period in the tobacco industry's controversial history. The underlying message to investors: wait to see how it all plays out.

Well, that's hogwash. Wall Street analysts always claim the next six months are crucial, with any stock, at any time, in any circumstance. Look beyond the minutiae, though, to assess the ultimate litigation threat to Big Mo, and you'll find that, risky as owning the stock may appear at first glance, not owning it--except for moral reasons, of course--is almost indefensible. Will Philip Morris and other tobacco makers face negative verdicts and pay out huge sums? Probably. But those payments will hardly be enough to kill the industry--and pale in comparison with the value buried in the stock.

Let's cut to the chase. There are two ways that these lawsuits--from class-action lawyers, individual plaintiffs, and state attorneys general seeking Medicaid reimbursement--could be resolved. They could all be settled in one fell swoop, or they could continue to drag on, as they have, for years to come.

In late 1996 and early this year, Philip Morris's stock soared on rumors of a "global settlement" via a legislative act of Congress. The idea of settling used to be anathema to the tobacco industry. Then a year ago renegade financier Bennett LeBow announced that his Liggett Group, the smallest and most financially troubled of the tobacco makers, would settle some of the lawsuits against it. Not long after, a lifelong Florida smoker was awarded $750,000 in damages by a jury--only the second time that a cigarette maker had been ordered to pay a cent. (The first case was thrown out on appeal.) Suddenly the industry began to soften its position. As mutual fund manager Robert Sanborn, whose Oakmark fund has a 7% position in Philip Morris, says: "A year ago [CEO] Geoffrey Bible would say, 'When you're right, you fight; and when you fight, you win.' Now he would say, 'My fondest dream is to hand this company over to a successor without litigation hanging over it.'"

Why the sudden turnabout? Tobacco execs have realized that a global settlement would free their stock from the weight of hundreds of different lawsuits and the threat of thousands more. Sanborn estimates that absent litigation, a business with Philip Morris's fundamentals would be worth $250 billion more than its current market value--the equivalent of a $309 share price compared with today's $114. That means that even if a settlement commits the company to pay out $5 billion a year for the next 20 years, the stock should soar.

Is the other side ready to cut a deal? The state attorneys general and plaintiffs lawyers are also eager for a legislated settlement. For one thing, their legal coffers don't have the same number of digits as the tobacco industry's. The cigarette companies have already had success beating opposing lawyers into submission. (Analyst Gary Black of Sanford Bernstein estimates that Philip Morris currently spends $600 million a year fighting tobacco litigation.) None of the lawyers have ever gotten a dime out of cigarette makers for their efforts. A guaranteed payday is a tempting proposition.

Standing in the way are two big obstacles. First: D.C. politics. Right now there is a clear sentiment that a pro-smoking settlement--or one that is perceived as such--would anger voters. "There is no rush in Congress to try and craft a settlement," says litigation analyst Mary Aronson of Aronson Washington Research. "Given all of the documents that are coming out, no [representative] wants to be seen as helping the tobacco industry get off easy." Pushing this line are public health advocates and antismoking activists who would love the FDA to regulate and restrict tobacco use. While the likelihood that an outright ban on smoking is remote--can you imagine the march on Washington?--politicians on Capitol Hill are unlikely to write legislation that doesn't meet some of the activists' demands. How to do that without alienating the tobacco companies is a tricky question.

The second obstacle is logistical: Even assuming that Congress was in a frame of mind to go along, could a settlement be crafted that would legally protect tobacco companies from additional lawsuits? That is the kind of guarantee they want, yet forcing all potential litigants to agree to a settlement's terms is a dicey constitutional proposition. Stanford law professor Robert Rabin notes that it is uncertain whether courts would uphold a settlement that prohibited plaintiffs from "opting out" and pursuing their cases independently. (This kind of limitation is usually granted only to a company in bankruptcy.)

For argument's sake, let's say no global settlement materializes or that one takes so long to come together, it is irrelevant for anyone with less than a five-year investment horizon. What, then, does Philip Morris offer investors? After all, another victory like the Florida case of last year could "spark thousands of similar plaintiff filings," as professor Rabin puts it. Wouldn't the stock take a beating?

In the short term, perhaps. Over the long haul, however, there's almost no set of circumstances that would make Philip Morris a loser. Let's say that Philip Morris's current $600-million-a-year litigation costs double to $1.2 billion. Let's say the company has to pay for 100 verdicts like the Florida case each year--no, make that 1,000. That adds up to $2 billion a year. At that rate it would take 125 years for the cost of litigation to equal the $250 billion penalty (according to Sanborn's estimate) that the market is currently imposing.

And the pool of potential litigants is going to run out a lot sooner than that. Many investors don't realize that only those who began smoking before 1966--when warnings began to appear on cigarette packs--have any standing to sue. As time goes by, fewer of those folks are left around. At the same time, if tobacco companies do start losing cases, it will likely propel Philip Morris not into bankruptcy--the company makes too much money for that--but rather toward a settlement. And that just means a bigger payoff for investors.

Provided that you have no moral qualms about owning a tobacco stock--and tackling that debate is not our business here--buying Philip Morris is really a question of weighing risks. If you take your gaze off the docket sheets and glance at the company's balance sheet, you can only love what you see. With the stock market highly valued and under increasing pressure, Philip Morris's shares carry a multiple that's less than half that of Coca-Cola's or Gillette's. Yet the company's return on assets is comparable, it is throwing off free cash at a rate of more than $2 billion a year, and the stock carries a hefty 4% yield. Philip Morris dominates its market like no other company. It has huge international expansion opportunities, enviable profit margins, little competitive pressure, and great customer loyalty. Its business is fully insulated from the effects of inflation, recession, or any other economic condition. All of this is a sure thing.

And on the other side of the risk equation, you've got a bunch of clattering lawyers who are eager to settle. The business of tobacco may not be pure, but the case for the stock is iron-clad. Indeed, it can be summed up in the words of the poet Charles Lamb, who in his 18th-century ode to tobacco wrote: "None e'er prosper'd who defam'd thee."