Maran Capital Management: Turning Point Brands ($TPB) Investment Analysis – Q2 2024

Maran Capital Management: Turning Point Brands ($TPB) Investment Analysis – Q2 2024

Introduction

Maran Capital Management has re-entered a position in Turning Point Brands ($TPB), making it one of their top five holdings. The fund sees TPB as an attractive investment opportunity with significant upside potential and limited downside risk.

Business Overview

• TPB operates in two main segments:
  1. Zig Zag rolling papers (benefiting from cannabis legalization)
  2. Non-combustible nicotine products (including Stoker’s oral tobacco and FRE nicotine pouches)

Market Position

• TPB has a market cap of ~$650 million and $225 million of net debt
• Enterprise value of approximately $875 million
• Expected to generate ~$100 million EBITDA and $50-$60 million free cash flow in 2024

Performance Analysis

1. Recent Challenges and Improvements:
   • Tumultuous 2022 and 2023 due to faltering vaping investments
   • New management team (CEO, CFO, Chief Revenue Officer)
   • De-emphasized vaping segment
   • Optimized inventory and generated cash
   • Paid down debt, including discounted convertible notes
   • Incubated FRE nicotine pouch product
2. Financial Metrics:
   • Trading at high single-digit free cash flow yield
   • Core brands (Zig Zag and Stokers) expected to drive mid-single-digit EBITDA growth

Growth Runway

• FRE nicotine pouch product presents significant growth potential:
  • U.S. nicotine pouch market size: $2.5-$3 billion, expected to double in coming years
  • FRE has PMTAs for 3, 6, 9, 12, and 15mg pouches (wider range than most competitors)
  • Established supply chain with room for capacity expansion
  • Potential to grow to $100 million revenue brand in next few years
  • Blue-sky scenario: 5% market share of a $5 billion market ($250+ million revenue)

Market Dynamics and Opportunities

• Nicotine pouch category experiencing rapid growth (e.g., ZYN’s growth from 13 million cans in 2018 to 385 million in 2023)
• TPB well-positioned to capture market share, leveraging experience from Stoker’s success
• Potential for FRE to reach $400+ million valuation in coming years (based on 4x revenue multiple)

Valuation and Expected Returns

• Current trading at ~10x free cash flow
• Maran Capital expects potential re-rating to mid-teens multiple over next three years
• Projected mid-20% annual return profile:
  • High single-digit starting yield
  • Mid-single-digit growth
  • 10%+ from multiple expansion

Other Key Points

• Insider buying: Executives and board members recently purchased shares
• Capital allocation: Restarted share buyback program
• Potential to repurchase up to 1 million shares annually (out of 17.6 million outstanding)
• Unique position as a growth company in nicotine/cannabis-adjacent space with buyback potential
• Normalized free cash flow per share projections:
  • $3.50-4.00 in 2025
  • Over $5.00 by 2027
• Potential valuation of $75-90 per share in a few years (at 15-18x multiple)
• Possibility of acquisition by a major tobacco company

Maran Capital views TPB as an asymmetric investment opportunity with limited downside risk and significant upside potential, particularly if the FRE product line succeeds in capturing market share in the rapidly growing nicotine pouch category.

Click here for the full pro investor letter.

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