Turning Point Brands Q4: Entry Into Oral Nicotine Pouch Category Is A 2024 Catalyst (TPB)

Turning Point Brands Inc (NYSE:TPB) reported its latest quarterly results capping off a transitional year in an ongoing turnaround compared to a weaker 2022. Recognized as a leader in smoking accessories and alternative tobacco products, TPB is far removed from the pandemic-era growth boom but is managing to drive solid profitability.

We last covered the TPB back in 2019 noting the attraction of the company’s unique diversification with exposure to both Cannabis consumption through its flagship brand of “Zig-Zag” rolling papers as well as the momentum in “Stoker’s” chewing and snuff tobacco.

While we continue to see value in those segments, the company’s recent entry into the oral nicotine pouch category through the “FRE” brand represents a new high-growth driver we believe is a bullish catalyst for the stock. Overall, TPB is a quality small-cap, well-positioned to deliver positive returns.

TPB Earnings Recap

TPB reported Q4 non-GAAP EPS of $0.79, up from $0.69 in the period last year. Revenue of $97.1 million declined by -6.1% year-over-year, while a shifting sales mix and higher average pricing drove the gross margin to 52.0% this quarter from 47.9% in Q4 2022.

Sales from the Zig-Zag segment fell -2.9% to $45 million, although management noted the bulk of that decline was due to the discontinuation of an unprofitable product line. The top-line decline also considers an exit from the “vaping business” consolidated within the smaller “Creative Distribution Solutions” group.

The bigger story is likely the stronger momentum from Stoker’s with sales of $38 million, up 18.6% y/y. The portfolio of Stoker’s products is now found at 81.7k stores with a target to add another 30k-50k stores in a national distribution effort.

The takeaway here is that despite the total sales decline, the core business remains strong evidenced by the 7.5% y/y climb in adjusted EBITDA to $24.8 million this quarter.

With this earnings announcement, the company also hiked its dividend by 8% to a new quarterly rate of $0.065 per share which yields a modest 1.1% on a forward basis. The annualized payout of $5.3 million is well covered by more than $61 million in free cash flow generated over the past year.

What’s Next For TPB?

In terms of guidance, management comments during the earnings conference call projected confidence of stronger growth through 2024. is targeting full-year adjusted EBITDA between $90 and $100 million, approximately flat from 2023 of $95 million given some higher spending towards the rollout of new products including FRE with a wider distribution.

On this point, Turning Point Brands sees a significant market opportunity in this segment of oral nicotine which has exploded in popularity in recent years. FRE is intended to compete with “ZYN” from Philip Morris International Inc (PM) in what has evolved into a $2 billion market that grew 67% y/y in Q4.

Beyond a limited early launch, the strategy for 2024 is for FRE to see wider national availability, leveraging the logistical network already in place from Stoker’s snuff and chew tobacco brand. The idea here is that the ability of FRE to capture just a small slice of market share can translate into a materially positive impact on earnings.

We sense that FRE has the potential to help firm-wide growth and earnings outperform expectations. Looking at a single published Wall Street 2024 revenue forecast, the forecast for a -6% decline appears too pessimistic in our opinion. By this measure, TPB appears compelling trading at an 8x forward P/E multiple given the number of positives in the outlook.

From the stock price chart, TPB is approaching the $26.00 level, which has represented an important area of technical support since late 2022. We believe a breakout here could set the stage for a more sustained rally above and beyond $30.00.

Final Thoughts

We rate TPB as a strong buy with a price target for the year ahead at $35.00 representing a 15x multiple on the current consensus 2024 EPS of $3.00. As we see it, a string of strong quarterly results this year can help drive bullish sentiment toward the stock and support an expansion of valuation multiples as while earnings estimates get revised.

Ultimately, the potential success of FRE scaling quickly with a national distribution sets the stage for a stronger long-term growth outlook. This would be incremental to the strengths of the existing product portfolio.

Beyond a major deterioration to the macro backdrop that would undermine sales momentum, the key risk to consider would be some regulatory setback, particularly in the FRE segment of oral nicotine.

While most studies have shown this type of product to be a “less harmful” alternative to combustible cigarettes, headlines related to legislative efforts could introduce some volatility in the stock price. Monitoring points for TPB include the gross margin and cash flow trends.