Because investors were looking to see how Philip Morris International (NYSE:PM) performed without the issue of merging with Altria (NYSE:MO) on the table, they welcomed the global tobacco giant's rather strong results, which handily beat analyst expectations.

While traditional cigarette shipment volumes continued to fall as expected, gains accrued in heated tobacco for both shipment volume and market share. And that doesn't even include the potential benefits of being sold in the U.S., the world's largest e-cig market, as the devices have only just been introduced here. As they move from the Atlanta test market to national prominence, Philip Morris can hope for even stronger future results.

IQOS heated tobacco device.

Image source: Philip Morris International.

Heated tobacco growth looks unstoppable

Philip Morris International reported that despite cigarette volumes falling 5.9% in the quarter, revenue rose 7% on a currency-adjusted basis when price hikes and a shift of around $70 million or $80 million in costs originally planned for in the quarter shifted into the fourth quarter. As a result, operating income and margin both benefited, and earnings per share rose almost 6% to $1.43 after excluding the impact of currency exchange rates, beating Wall Street's expectations of $1.37 per share.

The market really seemed to like the big gains in shipment volume the tobacco giant posted for its IQOS heated tobacco device, which surged 85% year over year, lifting year-to-date volumes by almost 46%. It bodes well for when Altria rolls out IQOS nationally here.

Although it's early in the development and introduction of IQOS, Philip Morris believed acceptance and share gains in the U.S. would be similar to what it experienced in Italy, where it gained around a 4.5% share of the market after about five years. This differs from Japan, where because it was the dominant e-cig almost from the beginning, the tobacco company says things have changed in the intervening years.

It noted the public is a lot more knowledgeable and accepting of reduced-risk products (RRPs) today, and while the IQOS probably won't do as well as quickly as happened in Japan -- where e-liquids are regulated like pharmaceuticals, so the IQOS was the only RRP allowed on the market -- U.S. growth will probably fall somewhere in between those extremes.

U.S. vaping risks growing

Philip Morris estimated there are approximately 12.4 million IQOS users worldwide, with nearly three-quarters of them, or some 8.8 million users, having stopped smoking and completely switched over to IQOS. The rest, it says, are in various stages of conversion.

Arguably the biggest risk for Philip Morris and Altria regarding IQOS in the U.S. is the recent health scare over vaping. There have been 33 deaths linked to vaping, and thousands more have suffered lung illnesses and injuries. It's believed illicit vape cartridges used in more traditional electronic cigarette devices are the root cause for most of the cases, particularly those that have been laced with THC, the psychoactive compound found in marijuana. But the vaping public might lump IQOS and other safer e-cigs together with the illicit ones, and users may return to smoking.

Early indications suggest that's happening already: Analysts at Cowen & Co. found traditional cigarette use bounced 1 percentage point higher in September following numerous consecutive months of decline.

Better off alone

The global cigarette leader backed out of merging with Altria as its investors balked at adding the exposure risk of the U.S. tobacco company. Particularly as concerns about vaping grow and regulatory questions about its investment in Juul Labs persist, investors felt if they wanted to add the domestic cigarette market to their portfolios, they could do so on their own by purchasing Altria's stock.

Before numerous adjustments for the coming quarter, Philip Morris expects to report adjusted earnings of $4.73 per share, below its prior outlook of $4.94 per share. Taking into account the various adjustments, it expects earnings of $5.14 per share, below consensus estimates of $5.27 per share.

Even so, Philip Morris International's stock got a small boost after the issuing of its earnings report on the better-than-expected results, yet it still trades at a substantial discount at about 15 times trailing and forward earnings estimates. Because it still has significant pricing power around the world, and both its own fundamentals and those of the industry remain sound, the tobacco giant looks to be in good shape for future growth.