Neither Altria (NYSE:MO) nor Philip Morris International (NYSE:PM) are doing very well at the moment, with shares down over the past year by 26% and 34%, respectively. It looks like a choice of the lesser of two evils.

Both companies have been dragged down by concern over how the electronic cigarette market will impact their legacy tobacco business, particularly after Philip Morris reported a slowing in Japan for its iQOS device. With doubts hanging over both companies, let's see which may be the better buy.

Woman holding iQOS device

The Philip Morris iQOS. Image source: Philip Morris International.

The case for Altria

Despite concerns about electronic cigarettes, Altria's first-quarter earnings report really wasn't all that bad. Sure, traditional cigarettes continue their weary decline, and it actually served as a drain on its Marlboro brand's market share, which slipped to 43.2% -- and lowered Altria's overall share of cigarettes to 50.3%. But its smokeless tobacco division performed surprisingly well, enjoying a 13% rise in revenue net of excise taxes. And it led to a big 27% surge in adjusted operating income.

Altria also has stakes in the wine industry, which saw incremental increases in revenue, but a big slide in operating profits; and in Anheuser-Busch InBev, from which it earned about $342 million. Despite declining beer consumption in the U.S., particularly from megabrewers like the Budweiser owner, elsewhere around the globe its beer is in high demand.

It was an overall performance that allowed Altria to reiterate earnings guidance of 15% to 19% growth in per-share profits this year

If Philip Morris gains marketing approval for the smokeless iQOS device in the U.S., then the e-cig will be marketed under the Marlboro brand -- and because of its agreement with the global giant, Altria will reap part of the benefit, too.

Man breaking cigarette in half

Image source: Getty Images.

The case for Philip Morris International

Investors were definitely less than impressed with the earnings report from Philip Morris International. Because it has been pushing hard that it wants everyone to quit smoking and switch to e-cigs, investors were dismayed at the lackluster growth it recorded with its iQOS device, particularly in Japan.

That market is Philip Morris' largest, and unit shipments have surpassed those of traditional cigarettes. But growth slowed dramatically in the first quarter because the company has saturated the early adopter market for the iQOS -- which is a reusable and therefore one-time purchase -- and now it needs to convince older, more conservative smokers to make the switch. That's a harder nut to crack, and the fact that these smokers represent 40% of the market makes it especially challenging.

Philip Morris, however, has committed to spending what's necessary to get them to switch. And it's encouraged that the company hasn't really lost any customers even though a number of new competing products have entered the market.

The iQOS holds an 80% share of the Japanese e-cig market. And although devices from British American and Japan Tobacco have come onto the scene, Philip Morris estimates that only about 1% of iQOS users have switched.

In the U.S., although the situation is uncertain, it's not gloomy. While earlier this year, the advisory council to the Food and Drug Administration (FDA) said the agency should deny Philip Morris' application to allow the iQOS to be marketed with a reduced-risk label, it seems probable that the FDA will at least allow the device to be sold here. A reduced-risk label would be optimal, but not having one is not essential.

It's quite possible that even without the designation, the iQOS could steal significant market share from competitor JUUL Labs, particularly as the company has come under fire for its JUUL device's popularity with teens. The company has committed to spending $30 million to make sure its device is properly used, but that could give Philip Morris the opening it needs to sell its e-cig, which looks more like a traditional cigarette.

The verdict

Although both stocks have been beaten down, they still have the opportunity to bounce back sharply. They both trade at cheap earnings multiples and remain quite profitable, with the potential to continue growing earnings in the future.

This one could be considered a toss-up. Altria may rely upon Philip Morris for support in the e-cig market, but it has a portfolio of smokeless tobacco products that already bolster its bottom line. By adding the iQOS to the mix, its prospects only look better.

Moreover, although not discussed, there remains the undercurrent of a potential buyout of Altria by Philip Morris International. There have been no talks reported between the two, but many believe a tie-up once again between them makes sense, and considering how close their relationship is, there's a chance it could happen.

If you factor in that scenario, then Altria is the better buy; otherwise, an investor could likely do well by choosing either company.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.