When most investors think of tobacco companies, they think of companies like Philip Morris, but there is a smaller tobacco company that enterprising investors should familiarize themselves with called Turning Point Brands (TPB 0.25%).
Turning Point is a leader in the Other Tobacco Products (OTP) category, which consists of tobacco products other than cigarettes; these include the likes of e-cigarettes, roll-your-own, and smokeless tobacco products.
Despite the challenges brought on by 2020, Turning Point is having its best year ever, which is evident from the company's reported earnings.
Strong financial results
Turning Point experienced strong financial results for the first half of 2020, even while facing headwinds that can be directly attributed to the COVID-19 pandemic. During the first six months of the year, Turning Point generated revenue of $195 million, implying growth of 5.8%. To better understand these numbers, it is helpful to examine the company's segment results.
| Turning Point Segments | First Half 2020 | First Half 2019 | YOY Growth % |
|---|---|---|---|
| Smokeless products | $57.3 million | $48.7 million | 17.7% |
| Smoking products | $56.3 million | $50.9 million | 10.7% |
| NewGen products | $82.0 million | $85.4 million | (3.9%) |
| Total company | $195.7 million | $184.9 million | 5.8% |
Data source: Turning Point Financial Reports.
The Smokeless segment grew 17.7% to $57 million. Growth for the Smokeless segment was driven by double-digit sales growth of Stoker's moist smokeless tobacco (MST). The sale of chewing tobacco was up in the mid-single-digits from the same time last year. It appears that customers are gravitating toward Stoker's, as it is a better value proposition compared to the competition. With the current financial environment, customers appear to be more conscious of price, giving a boost to Stoker's.
The Smoking products segment has grown sales 10.7% so far this year. Within this segment, the growth came from U.S. rolling papers, which have seen higher consumption levels and some gains in market share. This was mainly due to better inventory and marketing efforts, as inventory levels last year had some depletion. Rolling papers are used for homemade cigarettes and cannabis -- this product segment could see significant growth in the future with wider legalization of cannabis.
Lastly, the NewGen segment saw record net sales of $82 million for the first half of the year. This is a decline of 3.9%. The segment experienced market share gains in vape distribution and contributions from growing products such as Solace and Nu-X. However, the overall vaping market has taken a big hit in the last year after a scare involving vape-related illnesses caused many vapers to quit and the U.S. Food and Drug Administration (FDA) to step in and better regulate the industry. Given that revenue only fell 3.9% year over year, Turning Point appears to be managing these issues well.
Overall, Turning Point has taken 2020 in stride, showing impressive revenue growth and product resiliency.
Smart deal-making
Turning Point has done a good job of executing a strategy that balances organic growth with strategic acquisitions.
The company recently acquired Dufort Holdings and Blunt Wrap USA for $46 million. Dufort has been the supplier for Turning Point's Make-Your-Own (MYO) cigar wrap products for years. With the purchase, Turning Point now has the intellectual property and manufacturing capabilities it plans to use to help benefit its Zig-Zag MTO cigar wrap brand.
However, those are not the only benefits that Turning Point will gain from the Dufort Holdings acquisition. As mentioned, Dufort has been a longtime Turning Point supplier and the consolidation eliminates significant costs associated with royalties, which will immediately uplift the company's EBITDA by $7 million. EBITDA is a measure of earnings before interest, taxes, depreciation, and amortization. This deal makes obvious financial sense, as Turning Point essentially acquired $7 million of EBITDA for $46 million, which comes out to a 6.6x multiple -- not bad!
Turning Point has a history of growing through mergers and acquisitions (M&A) in the past and will likely continue to do so. In fact, in January 2019, the company established a subsidiary, Nu-X Ventures, dedicated to the development, production, and sale of alternative products, and acquisitions in growing segments of the Other Tobacco Products market.
As a publicly traded company, Turning Point is in a unique position to acquire smaller tobacco companies because it has access to cheap capital (debt and equity). Making a small deal like Dufort won't move the needle for a larger company like Philip Morris, but it can drive significant value for Turning Point. M&A should prove to be a strong driver of earnings growth for the company in the coming years.
Image source: Getty Images.
COVID-19 challenges and opportunities
The tobacco industry is not an industry that has gone unaffected by this year's COVID-19 pandemic. For Turning Point, COVID-19 delayed normal price increases. The company also experienced supply chain disruptions with its cigar wrap manufacturer in the Dominican Republic, and higher operational costs because of efforts to maintain a safe work environment in production facilities.
The company has stood up to the market environment exceptionally well. Turning Point has seen growth from loose leaf chew business, and for the first time, the company's Stoker's brand was the number one brand in loose leaf. The company has also experienced higher levels of purchasing in its e-commerce platforms because of stay-at-home mandates.
So, what can be said about Turning Point? Well, its numbers seem to speak for themselves. The company has faced headwinds because of the pandemic but has also found opportunities through acquisitions, and management has done a good job in positioning the company. The bottom line is that Turning Point seems to have found its stride, with respectable growth and interesting opportunities moving forward.
