2023-08-04 12:58:33 ET
Summary
- Turning Point Brands reports strong financial performance for Q2-2023, with net revenue of $105.6 million and net income of $9.9 million.
- The company's Zig-Zag rolling papers brand and Stroker's moist leaf tobacco contribute significantly to its revenue.
- Turning Point Brands is positioned for future long-term growth with the legalization of cannabis.
- I rate the company as a hold for now.
Turning Point Brands ( TPB ) sells the iconic Zig-Zag rolling papers brand. It enjoys a large north American distribution footprint. Turning Point Brands reported on August 2nd strong financial performance for Q2-2023. The company consistently reports net income and free cash flow. The stock has gained about 8.4% over the last year and has long come down from its 2021 highs of $45 per share. I think the company stands to gain with the legalization of cannabis and is positioned for future growth. I rate the company as a hold for now and recommend a long-term strategy in the future.
Current Operations
Turning Point Brands is a consumer products company, which manufactures, markets, and distributes cannabis smoking accessories, chewing tobacco, and nicotine / CBD vape products. It operates in three business segments.
The Zig-Zag segment includes Clipper re-usable lighters and a variety of rolling papers and make-your-own blunt wraps. The Stroker’s segment includes chewing tobacco, moist leaf tobacco, and nicotine pouches. The NewGen segment has recently been turned into a wholly owned subsidiary called Creative Distribution Services. This segment markets and distributes vaping devices and e-liquids, including CBD and nicotine products.
The company has a large distribution footprint in North America and online. Zig-Zag rolling papers are the most popular premium rolling paper brand in US and Canada. They are available at gas stations, head shops, and at dispensaries. The demand for rolling papers, rolling cones, and blunt wraps should increase with the legalization of cannabis.
In addition to Zig-Zag, Stroker’s loose leaf chewing tobacco and moist snuff tobacco products are also top recognized brands. These products are available on a large scale in North America. Turning Point Brands employs a large national and regional sales force to ensure that its products are carried by large chain and independent retail shops.
Most of the company’s products are manufactured by third parties and the company has low operating costs. It grows its own moist snuff tobacco and contracts out other tobacco manufacturing. Its rolling papers and smoking accessories are made in France and its cigars in the Caribbean. The company has increased it reach by selling Zig-Zag products online and has set up online points of sale for wholesale.
The company did not give any updates on its NewGen segment, which consisted of the online sales and national distribution of e-liquids, CBD products, and vape accessories. This sector (Other Tobacco Products) is heavily regulated by the government. Turning Point Brands holds the highest risk in this segment of its business operations.
Q2-2023 Performance
Turning Point Brands reported net revenue of $105.6 million, representing a 2.6% increase YoY. The Zig-Zag products segment increased by 1.1% YoY and brought in $46.7 million, representing 44% of net sales. The company cited strong growth in its Canadian sales while US sales declined. The Stroker’s segment increased 7.4% YoY and brought in $36.1 million, representing 34% of net sales. Its third operating segment reported $22.8 million in sales, representing 22% of net sales.
The company reported gross profit of $52.5 million, up 2% YoY, and net income of $9.9 million, an 83% increase YoY. Adjusted EBITDA was $25.3 million, a 2.2% increase YoY, and Diluted EPS was $0.53. The company reported $124.1 million in liquidity which includes a $23.6 million credit facility. The company has $283 million in net debt and $484.5 million in total debt.
Turning Point Brands expects FY2023 EBITDA to be between $90 and $95 million. Current market estimate for Q3-2023 revenue is $104.37 million. Below is a chart of the last five quarterly reports.
Amounts in million of | Q2-2023 | Q1-2023 | Q4-2022 | Q3-2022 | Q2-2022 |
Revenues | 105.6 | 101.0 | 103.4 | 107.8 | 102.9 |
Cost of Revenues | (53.1) | (52.3) | (53.8) | (55.1) | (45.3) |
Gross Profit | 52.5 | 48.6 | 49.6 | 52.7 | 51.5 |
Total Operating Expenses | (31.9) | (30.8) | (29.4) | (32.9) | (33.1) |
Operating Income | 20.5 | 17.8 | 20.2 | 19.8 | 18.4 |
Net Income | 9.9 | 7.6 | (16.3) | 11.5 | 5.4 |
Cash and ST Investments | 100.5 | 104.8 | 106.4 | 105.7 | 107.4 |
Total Current Assets | 251.7 | 247.1 | 257.7 | 255.8 | 259.1 |
Total Long-Term Assets | 559.7 | 559.9 | 572.1 | 599.8 | 604.3 |
Total Current Liabilities | 41.7 | 36.3 | 41.4 | 41.9 | 49.0 |
Total Long-Term Liabilities | 430.4 | 440.0 | 458.7 | 469.2 | 476.4 |
Free Cash Flow | 11.6 | 12.9 | 12.9 | 8.3 | (8.8) |
Book Value Per Share | 7.3 | 6.7 | 6.4 | 7.3 | 7.0 |
Total EV / Revenue | 1.71x | 1.64x | 1.70x | 1.61x | 1.79x |
Median Price Target | 47.50 | ||||
Current Price | 25.42 |
Data from TIKR
Revenues and profits have been consistent from quarter to quarter. The company has reported free cash flow previously and has shown a profit every quarter. I think the company is positioned to continue its strong performance and increase its distribution footprint.
Stock Price Performance
Turning Point Brands stock price has been up 9.19% over the last year and 18.23% YTD. It is currently trading over its 20/50/200 moving-day averages. The stock price has declined since its all-time high of $59.83 reached in 2021. The stock price has mostly been down-trending and undergoing volatility cycles over the last year. It is possible that a new uptrend is emerging, which began in June. It is uncertain whether the stock price will return to its higher price channels around $45 per share.
The company has 93% large institutional ownership. 95% of its outstanding shares are float. The stock price is rallying from the earnings call and will likely drop before a new trend arises. The company pays a $0.25 dividend per share and the earnings rally typically lasts until disbursement date.
Valuation and Investment Strategy
The company seems to be overvalued at the moment and its median target price is too high for its valuations. Because Turning Point Brands is a cannabis support stock, it remains highly valued as a safe play. The company has shown resilience during inflation and recession. These factors keep the price high.
There is moderate risk with the company and future performance. Its third operating segment is highly regulated and requires large sums of money for authorization applications. If the government denies the application, then the product may not be sold. There are further issues with shipping these particular products (nicotine e-liquids, vape accessories, CBD products) using some shipping services. The other two segments, although still regulated, hold less risk.
Since the company stock price is overvalued, I recommend that investors watch the company and it performance and consider a good entry price for a future investment. The company promises slow growth and consistent performance. Consider that cannabis legalization increases this company’s revenue and distribution.
Conclusion
Turning Point Brands continues its strong financial performance with its Q2-2023 report. The company showed positive profits, income, and free cash flow. Its Zig-Zag brand products and Stroker’s moist leaf tobacco drive its revenue. The company continues to benefit from cannabis legalization. Although overvalued, there seems to be strong investor sentiment in the company. The strategy would be to profit on long-term growth. I rate the company as a hold for now, but recommend that investor watch the company.
For further details see:
Turning Point Brands Reports Positive Q2 Income And Free Cash Flow