Philip Morris International Inc. (NYSE:PM) stock continues to reel. Earlier this month, Philip Morris stock dropped 16% — its biggest drop ever since its split from Altria Group Inc (NYSE:MO) in March 2008. PM stock now trades at its lowest levels in almost three years.

The decline might seem like a buying opportunity. Tobacco stocks traditionally have provided above-market returns. (Altria stock is the most successful stock ever.) PM now yields more than 5%, and trades at 15.5x, the midpoint of its 2018 guidance.

I’m skeptical that’s actually the case, however. Yes, 15x+ is a cheap multiple for PM — and below its historical average. But its performance in the core cigarette business is weakening. That puts a lot of pressure on non-cigarette alternatives — what the company calls “heated tobacco” — to drive growth.

From here, that pressure looks like too much. And with earnings potentially headed for a long-term decline, so does a seemingly reasonable earnings multiple.

A Big Post-Earnings Fall for PM Stock

It really doesn’t look like the first-quarter results from Philip Morris were that bad. Adjusted earnings-per-share of $1.00 actually beat consensus estimates by $0.10. Revenue missed — but only by about $100 million, or roughly 1.4 points’ worth of growth. Philip Morris even modestly raised full-year guidance for earnings to $5.25-$5.40, up a nickel from the range provided after Q4.

From a headline perspective, it would seem the quarter would lead, at worst, to a modest decline in Philip Morris stock. But there is a clear cause for concern in the report. Volume fell 2.3% year-over-year. That figure missed estimates by over a point. Cigarette shipments fell 5.3%. Heated tobacco units — primarily the company’s IQOS product — more than doubled. But even that seemingly impressive growth wasn’t enough to come close to offsetting weakness in traditional cigarettes.

That’s a big problem. PM and its former sibling Altria spent more than $3 billion developing the product and millions more marketing it. (Marketing spend rose 23% in 2017, according to the 10-K.)

But growth already is decelerating, notably in the key market of Japan. Guidance was raised — but only because of a lower tax rate. CFO Martin King, on the Q1 conference call, noted a number of concerns for the balance of the year, including that “more conservative adult smokers” weren’t switching to IQOS as quickly as planned. And if IQOS isn’t a hit, the clear worry is that Philip Morris earnings — and PM stock — could see significant pressure.

Bull Case for Philip Morris Stock

With PM stock 33% off its 52-week high — and at its lowest levels in about two and one-half years — there is a case that the decline leads to a buying opportunity. Tim Biggam argued for selling put spreads on PM stock, a hedged entry that makes some sense. Nicholas Chahine recommended some similar trades while making the bull case for Philip Morris stock.

The bull case makes some sense. Until the big sell-off, PM had been a winner, outperforming both MO and the S&P 500 on a total return basis. Currency headwinds — a big problem for Philip Morris the past few years — finally have reversed. Yes, volume is declining — but volume declined in 2017, and Philip Morris still grew operating income 6% even with a negative 1.4 point impact from foreign exchange.

And again, PM is cheap, with its 15x+ P/E multiple a notable discount to its historical average. A 5.2% dividend yield only helps the case. While tobacco stocks have been written off in the past, the sector actually has performed rather well. British American Tobacco PLC (ADR) (NYSE:BTI) has doubled off financial crisis lows. Vector Group Ltd (NYSE:VGR) doubled between late 2012 and late 2015. For PM, bulls will argue that this, too, will pass.

Avoid PM

The problem with the bull case for PM, however, is that it’s mostly backward-looking. Yes, tobacco stocks have performed well — but sales are falling. Unit volume worldwide was down 2.8% last year, per the PM 10-K. That’s not a trend that is going to reverse. And at some point, price increases and cost cuts aren’t going to be enough to offset that trend. The problem here is similar to that of The Coca-Cola Co (NYSE:KO): It’s exceedingly difficult to grow earnings when consumers are trying not to consume the core product.

That’s why IQOS is so important to Philip Morris. And that’s why the market reacted so violently to the Q1 report. Philip Morris needs an alternative that can at least stem the negative tide. But while IQOS (and other cigarette alternatives) have made some progress with younger customers, traditional smokers aren’t coming around.

As a former smoker myself, that makes some sense. The experience simply isn’t the same. And if smokers choose not to migrate to heated tobacco — but rather quit — the recent declines are going to continue. And 15x earnings might sound cheap — but it’s not particularly so for a declining business.

As of this writing, Vince Martin has no positions in any securities mentioned.