(MONEY Magazine) – With November's $206 billion settlement with 47 states removing much of the liability risk facing tobacco companies, investors may be taking a fresh look at the two industry leaders. No. 1, Philip Morris, is a consumer powerhouse that ranks with the best stocks in the market. No. 2, RJR Nabisco, is a struggling company with turnaround potential.

For Philip Morris, the key benefit of the settlement is that it removes some of the uncertainty about the company's finances. While the pact still leaves the industry vulnerable to class-action and individual lawsuits, "the industry settled the claims that posed the greatest threat in dollar value," says Bonnie Zoller of Credit Suisse First Boston. Philip Morris' payments will reach $4 billion annually in 2008 and continue at that level for 17 years. Sounds like a lot--but Philip Morris has $5.5 billion in cash on hand and $3 billion to $5 billion in free cash flow projected for 1999. One sign of confidence: CEO Geoffrey Bible has already reinstated an $8 billion share-repurchase program, which should take in $3 billion of stock this year. Moreover, Philip Morris is hardly standing still. Spurred by industry's best marketing (read: the Marlboro Man), its share of cigarette sales has grown to 52% in the U.S. and 14% worldwide. Its Kraft division, the world's third largest food business, is thriving as well.

Overall, earnings are projected to grow at a 15% annual clip over the next several years. Yet the king of the industry trades at a decidedly unregal 15.7 times 1999 estimated earnings, 36% below the market's price/earnings ratio of 24.5. Other big consumer stocks with Philip Morris' growth rate often command multiples well above the market's. Graham Tanaka, president of Tanaka Capital Management, believes that Philip Morris warrants a market multiple right now. But hey, this is still a tobacco company, and that may be optimistic. If its P/E discount narrows to 25%, as some analysts expect, the stock would trade for $63. Add its 3.3% dividend yield, and you'd have a 21% return.

For RJR Nabisco, the tobacco settlement provides breathing room to focus on a much needed restructuring. Saddled by the debt from its infamous 1989 leveraged buy-out, RJR hasn't been able to keep pace with Philip Morris' aggressive advertising and marketing machine, says Gary Black of Sanford Bernstein. The result: a slow, steady decline in market share. The stock fell 24% in 1998 to $29 (on Dec. 15), and Black believes shareholders are losing patience with CEO Steven Goldstone and his team. "They are likely to get tossed out if they choose to do nothing to unlock value," he says. He expects rjr to announce a restructuring plan before its annual meeting in May.

Goldstone's first move will probably be to sell the international division or enter into a joint venture overseas with a stronger company. After that, he may have no choice but to spin off rjr's 81% stake in Nabsico. Analysts figure that a spin-off would give current shareholders stock worth a total of $35 to $39 for each share they hold today. Of course, there are no guarantees that either of these moves will occur--or that they'll boost the shares. But investors who bet on a turnaround will at least be pocketing a 7% yield while they wait.

--DUFF MCDONALD