This Relatively Small Tobacco Company Is Likely To Offer Better Returns Over Altria Stock

We think that Turning Point Brands stock (NYSE: TPB), a relatively small tobacco company, currently is a better pick compared to the tobacco giant Altria stock (NYSE: MO), given Turning Point Brand’s comparatively lower valuation of 0.8x trailing revenues, vs. 3.2x for Altria. This gap in the valuation can primarily be attributed to Altria’s superior profitability.

If we look at stock returns, Altria, despite a fall of 3% year-to-date, has outperformed Turning Point Brands, which is down 36%, as well as the broader markets, with the S&P500 index falling 13%. There is more to the comparison, and in the sections below, we discuss why we believe TPB stock will offer better returns than MO stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Altria vs. Turning Point Brands: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Turning Point Brands’ Revenue Growth Is Better

• Both companies posted sales growth over the last twelve months. Still, Turning Point Brands’ revenue growth of 5.0% is higher than 0.2% for Altria.
• Even if we were to look at a longer time frame, Turning Point Brands has outperformed, with its sales rising at an average annual average growth rate of 10.2% to $445.5 million in 2021, compared to $332.7 million in 2018, while Altria’s sales grew at 0.9% to $26.0 billion, currently, compared to $25.4 billion in 2018.
• Altria sells its tobacco products in the U.S. markets. Revenue is generated from the sale of smokable and smokeless products. Due to supply disruptions, the company’s revenue growth was impacted during the pandemic.
• Altria sold its wine business for $1.2 billion last year, with an increased focus on smoking and smokeless products.
• Our Altria Revenue dashboard provides more insight into the companies’ sales.
• Turning Point Brands sells vapor products, chewing tobacco, rolling papers, and cigar wraps, among others. Its Zig-Zag segment, which includes rolling papers, cigar wraps, and smoking accessories, has been driving the sales growth for the company in recent years.
• Of late, Turning Point Brands is seeing a decline in its vapor business due to regulatory changes, primarily implementing a new rule in the Prevent All Cigarette Trafficking (PACT) Act late last year. After the recent regulatory changes, it has become challenging for anything related to vapor to be mailed to businesses or consumers.
• Turning Point Brands’ NewGen segment (which includes vapor products) sales were down a significant 41% in the first half of this year, accounting for just 23% of its total net sales (compared to 35% in the prior year period).
• That said, the company’s other segments – ZIg-Zag and Stoker have been doing very well, a trend expected to continue in the coming years.
• Looking forward, Turning Point Brands’ revenue is expected to grow faster than Altria over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 15.2% for Turning Point Brands, compared to a 1.6% CAGR for Altria, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. Altria Is More Profitable

• Altria’s operating margin of 17.6% over the last twelve months is higher than 12.6% for Turning Point Brands.
• This compares with 3.1% and 4.5% figures seen in 2019, before the pandemic, respectively.
• Altria’s free cash flow margin of 32.6% is better than 11.1% for Turning Point Brands.
• Our Altria Operating Income and Turning Point Brands Operating Income dashboards have more details.
• Looking at financial risk, Altria’s 34% debt as a percentage of equity is much lower than 94% for Turning Point Brands, while its 13% cash as a percentage of assets is lower than 20% for the latter, implying that Altria has a better debt position, but Turning Point Brand has more cash cushion.

3. The Net of It All

• We see that Turning Point Brands has demonstrated better revenue growth, has more cash cushion, and is available at a relatively lower valuation. On the other hand, Altria has a better debt position and is more profitable.
• Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Turning Point Brands is currently the better choice of the two.
• The table below summarizes our revenue and return expectations for Altria and Turning Point Brands over the next three years and points to an expected return of 58% for Turning Point Brands over this period vs. just 5% expected return for Altria stock, implying that investors are better off buying TPB over MO, based on Trefis Machine Learning analysis – Altria vs. Turning Point Brands – which also provides more details on how we arrive at these numbers.

While TPB stock may outperform MO, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Philip Morris vs. Coca-Cola.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 8/25/2022
[2] Cumulative total returns since the end of 2016

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