When looking at the investment opportunities found in tobacco giants Altria (MO 1.91%), British American Tobacco (BTI 0.80%), and Philip Morris International (PM 2.82%), it's really not a fair comparison. Altria and Philip Morris are more of a two-fer.

Until 2008, they were parent and subsidiary, and the subsequent spinoff made them separate entities. Altria would sell in the U.S.; Philip Morris would sell everywhere else in the world. But in 2013, they started collaborating on reduced-risk products, with Altria giving Philip Morris the right to sell its NuMark e-vapor products outside of the U.S. in exchange for being able to sell two of Philip Morris's heated tobacco products in the U.S.

Two years later they agreed to develop e-vapor products together to sell in the U.S., and that's leading to the proposed commercialization of Philip Morris iQOS heat-not-burn (HNB) electronic cigarette that is being marketed elsewhere in the world under Altria's Marlboro brand as HeatSticks.

By joining forces, as it were, they may just make themselves formidable adversaries in the marketplace, and a potent combination in your portfolio.

A pile of cigarettes.

Image source: Getty Images.

Competitive advantages hard to overcome

Because of industry consolidation, British American Tobacco is a heavyweight in its own right, and owns both Reynolds American and Lorillard as Reynolds had previously acquired it. So British American is no shrinking violet in the tobacco world. In fact, it is the largest tobacco company in the world by revenue and profit, and is also the world's largest vapor (e-cigarette) manufacturer.

Yet Altria owns the No. 1 brand, Marlboro, which has been the best-selling cigarette brand in the U.S. for over 40 years. Not coincidentally, Philip Morris declares Marlboro to also be "the world's best-selling international cigarette" and says it represents almost 10% of the cigarette market outside of the U.S. And while Altria owns nearly 51% of the U.S. cigarette market, over 43% of it comes from Marlboro alone.

The brand also accounted for approximately 35% of Philip Morris International's total shipment volume in 2016, and because it has a number of other brands that support Marlboro's heft, Philip Morris owns at least a 15% share of the cigarette market in over 100 different countries.

Their collaboration could also result in Altria gaining even greater share in the domestic electronic cigarette market.

iQOS store in Japan

Image source: Philip Morris International.

Up in smoke

As the number of smokers declines in the U.S. and around the world, many are using e-cigarettes in their place. Philip Morris has an application before the FDA to allow it to commercialize its iQOS heat-not-burn electronic cigarette while also working to have it garner a reduced-risk designation. If that effort is successful, Altria will gain a big competitive advantage over others on the market without such a designation.

Still, it's not a guaranteed win, and right now others hold a dominant position in the U.S. e-cigarette market.

Reynolds owns what was once the leading e-cigarette on the market with its Vuse product, but analysts at Wells Fargo say that JUUL Labs' Juul device now leads with a 32.9% share as sales surged 35%. Vuse has slowly been losing share to competitors, but it still holds a large stake with a 27.4% share, far better than Altria's third-place showing at 15.2% with its NuMark MarkTen XL device.

Imperial Brands blu eCig once owned nearly half the e-cigarette market when it was owned by Lorillard, but today its share has shriveled to around 11%, though that still puts it ahead of  Japan Tobacco's Logic e-cigarette with a 7% share.

A toss up

So to say which cigarette company would be the best buy, an investor could easily choose between Altria and Philip Morris and be satisfied, because they're pretty much getting two investments in one. In combustible cigarettes, for all the loss of smokers, Marlboro still holds a commanding lead in the U.S. and abroad, while in the still-developing next-gen electronic cigarette market, the iQOS could be the next big development.

While British American Tobacco has its own top-selling glo device that operates on heat-not-burn technology, too, the massive rollout Philip Morris has set for iQOS makes it the better choice from an investment perspective.

There's also one more thing that makes Altria or Phillip Morris the better investment: persistent rumors that PMI will acquire its one-time parent. That will officially roll the two companies into one and make an investment in either an investment in both. So it's a toss-up between Altria and Philip Morris International as the best buy.