Everyone has heard of large tobacco companies like Philip Morris, but less-known Turning Point Brands (TPB 5.36%) is worth paying attention to if you are an investor.
Turning Point is an independent U.S.-based "other tobacco products" company -- which basically means non-cigarette smoking products. The company has done a great job delivering earnings growth, even during the pandemic, and is setting up for a bright future if it can continue to execute on its strategy.
Strong brands within the other tobacco products category
Turning Point specializes in selling moist snuff tobacco, loose leaf chewing tobacco, premium cigarette papers, make-your-own (MYO) cigar wraps, cigars, and liquid-vapor products. This segment of the market is referred to as the "other tobacco products" category, and it accounted for $11.5 billion in sales in 2019. Unlike cigarettes, this segment has actually seen sales volumes increase, making it a more attractive market for Turning Point.
The company has built a portfolio of well-positioned alternative smoking brands, many of which lead their categories in terms of market share. Some of the company's top brands include Stoker's chewing tobacco, Zig-Zag rolling papers, and VaporBeast.
|Tobacco brand||Product||Market share||Category rank|
|Stoker's||chewing tobacco||20%||No. 1 discount, No. 2 overall|
|Stoker's||moist snuff||4.5%||No. 4 discount, No. 6 overall|
|Zig-Zag||cigarette papers||35%||No. 1 premium|
|Zig-Zag||MYO cigar wraps||75%||No. 1 overall|
In 2020, Turning Point has continued to show growth on the top and bottom lines, and has also increased its market share across several products. For example, Stoker's became the No. 1 brand in loose-leaf chewing tobacco for the first time.
However, the company's trademarks aren't new. The Stoker's and Zig-Zag brands are well-recognized and have been established over 80 and 120 years, respectively. This strong brand appeal paired with strong execution from the company's salesforce has produced attractive results for investors.
High barriers to entry in the vaping market
Turning Point created a segment called NewGen to capture some of the more innovative smoking products it has invested in, such as vaporizers, CBD, edibles, and other less-mature products.
NewGen has been grown primarily through acquisitions over the years. The company successfully acquired assets including Solace, VaporBeast, and IVG, which are leading distributors of e-liquids, devices, and accessories found in the vaping market. More recently, the company announced investments in Wild Hempettes -- a manufacturer of hemp cigarettes -- and dosist, a national CBD brand.
The alternative tobacco market is fraught with smaller players, but times are changing due to rising regulatory standards. There have been significant increases in state and local proposed or enacted regulations of these NewGen products. Additionally, the FDA now requires a premarket tobacco product application (PMTA) for any new tobacco products.
The PMTA process has proven to be particularly onerous for smaller companies because it's now significantly more expensive to get products approved by the FDA. For example, Turning Point spent $5.3 million in PMTA-related expenses during the third quarter of 2020. Small operators simply can't afford this expense, and many are being forced to shut down or sell their business to larger operators such as Turning Point.
The net effect of increased regulatory scrutiny has raised the barriers to entry in the other tobacco products market, and Turning Point stands to benefit from additional market share gains and opportunities to acquire smaller competitors at attractive prices.
Attractive stock price valuation
The cherry on top for investors interested in Turning Point is its valuation. The stock trades for just 16 times its expected 2021 earnings per share. This is more expensive than peer tobacco company Altria, but Turning Point is growing at a faster rate. On an absolute basis, Turning Point's valuation screens as attractively and is cheaper than the S&P 500.
Turning Point is definitely a stock worth watching. The company operates a somewhat under-the-radar segment of the tobacco industry and has managed to post impressive financial figures. Importantly, the company has strong brands and appears to be gaining momentum in 2020, as changing regulations have made it harder for smaller companies to compete.