Philip Morris International (NYSE:PM) might be trying to jawbone electronic cigarettes into becoming the future of its business, as well as the industry, but traditional combustible cigarettes remain its primary profit center.

With its stock down 28% from its 52-week high, let's see whether investors should buy into the tobacco giant on the premise that its legacy cigarette business will be carry it far enough that its next-generation products can then take up the baton.

Man breaking cigarette in half

Philip Morris International wants people to quit smoking and start using electronic cigarettes. Image source: Getty Images.

A dominant presence

Smoking remains a habit in decline, both here in the U.S. and around the world. Still, billions of cigarettes are smoked every year, and even if the numbers are steadily falling, Philip Morris International is selling a lot of them.

Over the first six months of 2018, the global tobacco leader shipped 355 billion cigarette units to international markets, a 3.3% drop from the year-ago level, and its Marlboro brand is still the worldwide favorite, shipping almost 127 billion, nearly half the total, and giving Philip Morris the leading market share in many countries.

The cigarette company has a 51% share in Italy, a 45% share in France, a 70% share in the Philippines, and a 73% share in Argentina. Marlboro has a 41% share all by itself in the U.S., where it is marketed by Altria (NYSE:MO).

Yet it's an expensive business to operate as governments around the world impose heavy taxes on its product. Of Philip Morris' $21.1 billion in second-quarter revenue, 63%, or $13.3 billion, went to excise taxes, leaving it $7.7 billion in net revenues. But it's still a profitable business.

After subtracting out its expenses, the global tobacco giant produced operating margins of over 40%, a rate it has achieved fairly consistently since it was spun off from Altria in 2008. It also pays investors a dividend that's currently yielding 5.3%, and it has raised the payout to shareholders every year since the spinoff.

Prior to the current drop in its share price, returns on Philip Morris International stock had been outpacing those of the S&P 500, but now it lags the market index.

Man exhaling vapor from an electronic cigarette

Image source: Getty Images.

Electronic cigarettes suddenly fizzle

That drop was due to the surprising softness in the company's electronic cigarette business. Japan is Philip Morris' most developed market, and shipments of its heated tobacco iQOS device exceed those of combustible cigarettes. The popularity of the e-cig caught rivals like British American Tobacco and Japan Tobacco by surprise, and they have since rushed their own products to market.

Still, the iQOS practically owns the Japanese e-cig market, with an 80% share, so when Philip Morris unexpectedly reported a slowdown in sales earlier this year, saying it had captured most of the early adopters and now had the much harder task of convincing older, more conservative smokers to switch, its stock sharply dropped.

Japan is unique in that most competing types of electronic cigarettes are effectively banned. The e-liquids used in devices such as those that are popular here in the U.S. are classified as a pharmaceutical ingredient in Japan, and the heavy regulation has largely prevented competing products from entering the market.

Investors are seemingly questioning now whether the iQOS can be as popular or dominant elsewhere -- particularly in the U.S., the world's largest cigarette market -- since consumers have access to many different types of e-cigs.

Philip Morris is awaiting word from the Food & Drug Administration on whether it can market the iQOS with a reduced-risk label. If it gains approval, that could give it a competitive edge, though with the agency's advisory panel recommending against it, it seems like a long shot.

Is Philip Morris International a buy?

The cigarette leader is still operating a profitable business. And though its mainstay combustible cigarettes are slowly fading away -- and Philip Morris itself is actively trying to wean smokers off of them -- it remains a business that is not going away anytime soon.

That means Philip Morris International will continue to churn out profits for investors for years to come. Even if its iQOS heated tobacco product doesn't cause the mass migration to electronic cigarettes originally hoped for, it is still likely to be a leading product in the marketplace -- and for the tobacco company.

Although the drop in share price has caused Philip Morris to trade at just 16 times trailing earnings and 15 times next year's estimates, it still goes for four times its sales and 72 times the free cash flow it produces. That's not cheap, and it may take a further erosion in its stock's value to put it in a price range that would make it more interesting to investors.