Jefferies lowered its rating to hold from buy on shares of both Philip Morris and Altria, saying the tobacco companies are falling behind in heated tobacco markets and falling behind in vapor product markets.

"See significant share loss" for Philip Morris in Japan's heated tobacco products market during the second half of this year and expect the U.S. heated market to now have a "smaller contribution," Jefferies analyst Owen Bennett said in a note Friday.

Altria is "at a disadvantage in vapour due to available formats, and concerns around delay on IQOS [the company's heated tobacco device] will likely weigh," Bennett added. Philip Morris has invested over $4.5 billion in the last decade to develop smoke-free products such as IQOS.

Shares of Philip Morris fell 3.1 percent in trading, while Altria's stock fell 1.8 percent. Jefferies lowered its price target on Philip Morris and Altria to $80 per share and $61 per share, respectively, from $93 per share and $70 per share.

Philip Morris and Altria products that claim to reduce the risks of smoking, or RRP, are penetrating tobacco markets "slower than before," Bennett said. Jefferies lowered its expectation for RRP penetration by fiscal year 2026 to 41 percent in U.S. and overseas markets, down from 51 percent and 61 percent, respectively.

Jefferies now sees "RRP volumes skewed to vapour vs heated," Bennett said, noting it as a "negative for" Philip Morris "as it is likely to continue to focus on heated due to risk of dilution from shift to vapour." Jefferies expects Philip Morris to "lose sizeable shipment share" in the second half of this year as "we see full year Japan volumes down to 23 billion from 31.3 billion" in fiscal year 2017, Bennett said.

"We still see IQOS approval but don't foresee a launch till 2Q19 at the earliest," Bennett said.