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Why the vaping craze is an opportunity for Philip Morris

Big tobacco firm Philip Morris International (PM) may have seen shares tumble more than 35% in 2018, but that’s not stopping analysts from expecting big things from the company in 2019.

Citing the rising popularity of the company’s newest smoking cessation device, iQOS, and its effectiveness in getting smokers to switch, Piper Jaffray reiterated its Overweight rating and $110 price target that represents a more than 60% upside for the international seller of Marlboro cigarettes.

“We consider [Philip Morris International’s] strong underlying core earnings growth and incremental iQOS earnings to be attractive,” Piper Jaffray Senior Research analyst Michael Lavery wrote in a year-end note. “We believe iQOS expectations in Japan look achievable, and we believe Russia is an under appreciated opportunity.”

Of course, shifting to reduced harm tobacco products like e-cigarettes has long been the goal of Philip Morris CEO Andre Calantzopoulos. He’s directed more than $4 billion in research and development into IQOS, which is still awaiting U.S. Food and Drug Administration approval before it can be sold in the U.S. In the meantime, sales have been impressive in Japan and Russia, despite limited marketing, Lavery noted.

The Juul threat

Domestically, sister company Altria Group (MO) has seen e-cigarette sales increase steadily over the past few years. That growth has contributed to an accelerated decline in traditional cigarette sales. Altria’s cigarette sales by volume dropped 4.2% in the last nine months of 2018 compared to the historical 3%-4% decline.

That downward trend played a role in Altria’s decision to invest $12.8 billion in e-cigarette category leader Juul Labs, which accounts for about 75% of all U.S. e-cig sales, according to Nielsen data. Even though Altria has agreed to sell Philip Morris’ iQOS device in the U.S. pending FDA approval, Altria CEO Howard Willard admitted on an investor call announcing the Juul investment that he was growing “impatient” waiting for the iQOS go ahead.

A man breathes vape from an e-cigarette at a vape shop in London, Friday, Aug. 17, 2018. A report by the British science and technology MPs committee suggest that rules around e-cigarettes should be relaxed to help accelerate already declining smoking rates. (AP Photo/Frank Augstein)
A man breathes vape from an e-cigarette at a vape shop. (AP Photo/Frank Augstein)

Calantzopoulos told Yahoo Finance in the wake of the deal that he was not concerned with Altria’s investment in a competing brand and doubt it will have a negative impact on iQOS sales in the U.S. if approval is granted in 2019.

“I think there is enough room in the market for both products, e-vapor products and heated tobacco products like iQOS,” he said. “The e-vapor category in the U.S. today is estimated around 8% of total nicotine consumption, there is another 92% of people smoking today to switch and I think there is room for everybody.”

Wells Fargo analyst Bonnie Herzog agreed in a note following the deal’s announcement, predicting the two products could appeal to two different types of old and young smokers. As such, she also reiterated her Outperform rating and $100 price target for Philip Morris.

“We believe [Philip Morris International] should be a core holding... in 2019 and encourage investors to accumulate shares ahead of the next positive catalyst which is the FDA’s PMTA approval of iQOS,” she wrote, adding that considerably better margins on the company’s device compared with its traditional cigarettes would help drive profit growth moving forward.

Zack Guzman is a senior writer and on-air reporter covering entrepreneurship, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.

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