US: Turning Point Brands: Little Known Tobacco Company Is A Long-Term Growth Machine

Source from:  Seeking Alpha 06/26/2018

This article examines Turning Point Brands, a Kentucky-based small cap in the other tobacco space.

Although this $600 million firm remains largely unknown, it sells some of the most prominent brands of chewing tobacco and rolling papers in the U.S.

Turning Point Brands is unusual with its asset-light strategy, but the model gives the business a lot of free cash.

Secular growth and other tailwinds will benefit this company over the long run; the stock is a buy at 30 times earnings.

Whenever investors think of tobacco stocks, heavyweight companies such as Altria (MO) and Philip Morris International (PM) are the first that spring to mind. To the general public, the cigarette producers remain synonymous with tobacco. But what about other tobacco products such as chewing tobacco, and related merchandise such as vaporizers and rolling papers?

Enter Turning Point Brands (TPB), a little-known but well-run company with a market capitalization of $600 million. The Kentucky-based firm is unusual for a tobacco company in that it follows an asset-light strategy, with many of its brands licensed from and/or manufactured by other companies. This model enables TPB to generate substantial free cash flow, which it plows back into organic growth and bolt-on acquisitions. While cigarette producers face increasing regulatory pressure and a decline in smoking rates, TPB’s products benefit from several tailwinds that make the company a buy for the long run.

Unknown Company, Well-Known Products

Although TPB flies under the radar, its products command strong brand loyalty. Zig-Zag rolling papers and Stoker’s chewing tobacco are two of the company’s best-known brands, each holding a significant market share. Following its asset-light model, TPB licenses the Zig-Zag brand and contracts out the manufacture of Stoker’s to another company. Approximately 84 percent of TPB's gross sales are generated through this outsourcing model.

In 1992, TPB licensed the Zig-Zag rolling paper trademark from French conglomerate Bolloré for an initial 20-year term. In 2012, TPB renewed this agreement for another 20 years. Zig-Zag is the number one rolling paper brand in the U.S., holding a 33.5 percent share in the cigarette category and an 81 percent share in the cigar category. Cigar wraps are manufactured under contract with Durfort Holdings S.A.  Enditem