Turning Point Brands

Target Price


Company overview — TPB sells smoking accessories and consumer brands in tobacco products. The big brands in the portfolio are Zig-Zag rolling papers and Stoker's moist snuff and chewing tobacco.
  • Zig-Zag is the #1 brand in the US with 34% market share (per 2020 10-K) -- was 30% market share in 2017 10-K
  • Stoker's with 5.2% total US market share in moist snuff -- had 2.9% total market share in 2017
  • NewGen segment is the "alternative" products category -- mostly tied to vaping, CBD, cannabis ◦ Upside opportunity from margin improvement at NewGen
Acquisition history — Mostly investing in NewGen segment via minority + control investments — M&A spend totals $106m from 2016-2021
  • October 2020 -- Invested $15m in dosist, global cannabinoid company
  • June 2020 -- Acquired MYO cigar wrap maker Dufort for $47.7m in cash and promissory note
  • November 2016 -- VaporBeast for $27m
4Q21 earnings call — Management changing stance on M&A pretty dramatically — sounds as though they’ll put a stop to small minority investments in brands, consider large-scale acquisitions, and look beyond just the tobacco/cannabis industries
Gaurav Jain I have a few questions here. So number one is, Yavor, on your plan to make TPB into a much larger company. Your stock is trading at 10x speed approximately, and the free cash flow is about $60 million. So how do you use either your equity or free cash flow to become a much bigger company?
Yavor Efremov So look, I think you used a combination of both, and you had -- it's going to be very much dependent on the target and on the deal structure. It has been done before. I've done it before. I did it at Liberty when the vehicle Liberty used to acquire Formula 1 at the time had about $1 billion of cash and acquired an $8 billion asset. So how does that happen? With a lot of structuring and some of our investments and a lot of talking to investors. So it is possible to buy somebody who is much bigger than yourself. We're setting our size that high for our first acquisition. We're not going to say no if it showed up. At the same time, I would interpret my comments primarily to mean that we're out of the small minority investment business. Again, never say never. But our preference would be hundreds of millions and above. And all of that with the profit structuring with some outside capital should be global. Again, it depends on the target, depends on the situation, depends on the structure. But I'm not a stranger to complex structuring. I've done it before. I'm not a stranger to raising capital from outside investors. I've done it quite in size. I raised $1.5 billion for Formula 1. I raised $2 billion in cash for Charter. And that's from calling people showing them a proper structure, showing them a target, explaining the strategy. It's not easy. It doesn't happen all the night, but it can be done fairly quickly with the right target and the right structure.
Gaurav Jain Sure. And which industries would be your focus? Would it be tobacco? Would it be cannabis? And cannabis, I guess, to Vivien's question, you almost are downplaying it or it could be something like -- I just read today that Standard General has acquired a media company. So could it be completely outside of how we think about Turning Point Brands?
Yavor Efremov I would say all of the above. We don't want to preclude an opportunity. I can tell you that it's highly unlikely that you would see us investing in space tourism. There are areas that are going to be completely outside of scope. Anything we buy, it's kind of the idea would be for it to make us larger and more diversified and enhance our balance sheet. And therefore, to me that means decent cash flow. There's a growth story of what we believe is going to be a growth story behind it. We need to bring something more than just, hey, we can find capital for you. And so there's got to be some logic to it that makes sense. And above all, the way I view my job is kind of job #1 continues to be running the business. There's no caveats or exceptions to that rule. Job #2 is capital allocation. So I will allocate capital in a way that drives side of the shareholders. And if that happens to be in tobacco or someplace else, so be it so long as this value driven to shareholders. Again, our preference will be to diversify. So the bar for tobacco is going to be higher in terms of the multiple we will be willing to pay. But again, if it checks our other boxes, the door is open to conversations.
Historical financial summary 2020-2014 — TPB has long been a growing and stable business
Segment financial performance — Zig-Zag and Stoker’s are great businesses; NewGen not so much
Comparable multiples — TPB trading in-line with major tobacco companies like $MO and $BTI at ~9x earnings but slightly lower at <8x EBITDA

Financials & Valuation

Capitalization (2Q22) — There are 17.8m shares outstanding at 2Q22 x $25 share price = $445m market cap. Net debt is $308m for a $753m enterprise value. Guidance calls for $100m EBITDA (mid-point) for leverage of 3.1x and EV/EBITDA multiple of 7.5x.


August 2022 — 2Q22: NewGen segment sucking, Zig-Zag & Stokers just fine

Growth trends started to reverse in Q2. Sales were down 16% and EBITDA was down 17.6%. Cash flow also went negative as the company builds inventory.

There are a few bright spots. They repurchased ~$8.9m or 2% of shares during the Q. The main brands Zig-Zag and Stoker’s continue to perform well with growth rates of 5-20% guided for the full year.

It baffles me why an activist wouldn’t come in and sell off or shutter the entire NewGen segment, bring corporate costs inline with ZZ/Stoker’s sales levels and earn an extremely high multiple on that business. One could sit back and simply enjoy the organic tailwinds from the cannabis use case for these products.

At a 10x EBITDA multiple this stock is worth ~$40 per share.

February 2022 — Tweet thread on FY21 earnings call
December 2021 — VDL Portfolio Update
Onto TPB  — I view this as my singular exposure to the cannabis market with their ownership of the ZigZag rolling papers brand. This business has a long history of stability, margins, and cash flow (even prior to its life as a public company). Management has taken a slow and steady approach to turning that cash flow into more cash flow through a “collection of brands” strategy. There’s a long runway here for both organic growth (shift from tobacco to cannabis) and inorganic growth. And it comes with one of my favorite setups — cash flow has grown over the past 5 years while price/cash flow multiple has contracted.
July 2021 — VDL initiation report
July 2021 — VIC write-up: long at $52/share
Insider trading activity