Very insightful post. Thanks for putting it together. I'm not familiar with the nicotine industry so seeing the details on industry structure and distribution of product sales across types was super interesting.
I'm curious how you view the threat of non-traditional nicotine sales channels to the SWMA thesis. I've noticed Amazon lists competing nicotine pouch products and Zyn is nowhere to be found (https://www.amazon.com/s?k=nicotine+pouches). With MST & pouch sales still a small portion of the overall nicotine market and penetrating into new consumer buckets fast, this whitespace could be filled by rivals utilizing more convenient sales channels than a c-store. Given the stickiness of consumers to pouch brands/flavors, SWMA could lose out on the new basket of consumers buying from Amazon or other online channels. Do you view this as a material risk? But maybe the market is so large and it won't matter since SWMA is generating 233% incremental returns on capital :)
I can definitely speak to the stickiness of the products and how new non-traditional consumers are exploring the pouch products. On a tip from a friend, I recently tried a 3mg pouch and now can't stand to try any other brand/flavor. Prior to trying, I never smoked or dipped tobacco. One last thing - when I read people out there are taking 12mg pouches my jaw hit the floor. That's nuts to me.
Very cool insights Ryan, thank you for sharing your story. At the current moment, c-store's remain the primary distribution channel in America (~97% of OTP sales), and it is unlikely that e-commerce usurps the c-store's dominance in the US. To my knowledge selling on Amazon is illegal, because it does not require age verification. None of the top 5 players - SWMA, Altria, BAT, TPB, or Swisher - seem to have their products listed on Amazon in the US. The regulation is different in Europe, and SWMA does sell via this channel in the Nordics. I hope that was helpful.
Also, 12mg is not that extreme. I know a ton of people personally in Canada (myself included) who used to import Siberia Snus from Sweden (43 mg lol).
Amazing piece! The only thing I'd like to have read more about would be an analysis of the market valuation compared to peers in addition to the chart of Jon and why a multiples rerating of SWMA is not likely.
Absolutely brilliant piece.. Matches up very well with my own analysis and a bit of confirmation bias nevers hurt for a beautiful business like this.. Just one question/comment on the terminal value multiple... Have you tried the valuation using a EV/Free Cash Flow multiple instead of the EV/EBIT? And is there a reason you didnt use EV/Free Cash Flow.. Thanks again..
I think you have correctly raised this risk, which could be quite important, which is that if Sweedish Match is the leader in smoke free in Scandinavia (54% marker share), but only has a 15% share of Nicotine Pouches, and the trend is an increasing demand of Nicotine Pouches, and they would be coming from the smoke free alternatives, how will this negatively impact Sweedish Match… is not a negligible part of the current business,
The dynamics in the Nordic market are a little different than in the US as there are fewer UX benefits to switching to NP from Snus. The only real benefits are no staining of the teeth and no stinging of the gums. Conversely, MST has more UX issues, namely the inability for convenient and discreet usage (i.e., requiring a "spitter").
From most of my communications with my Nordic friends on Twitter, NPs seem to skew more towards new nicotine customers (young adults and Women). The data supports this notion as traditional Snus shipments are still experiencing volume growth (vs. MST which has seen modest volume declines). Therefore, it's fair to posit that cannibalization is less of a threat in the Nordics than in the US. I've included a link to SWMA's latest earnings presentation with a great visual on the composition of smoke-free volumes over time (Snus + NPs).
Listened to your podcast and followed you here. Great write-up. As a generalist who has never tried any tobacco products I had to google what the various nicotine products are. Would have benefited from a quick primer and links to the health effects of various options. You will always be amazed about how little some of your readers will know going in! I have a strict ESG policy where I am now allowed to buy any stocks my wife would disapprove too strongly :). This seems like a great way to get exposure to this industry. Love the low beta/economic exposure. And it does seem to trade at a low valuation given the quality and growth runway.
Im sorry but where could I find more info on incremental operating margin? You make a big point out of this but when I look up the smoke-free operating margin and it is 44.8% in Q4 2020.
Very insightful post. Thanks for putting it together. I'm not familiar with the nicotine industry so seeing the details on industry structure and distribution of product sales across types was super interesting.
I'm curious how you view the threat of non-traditional nicotine sales channels to the SWMA thesis. I've noticed Amazon lists competing nicotine pouch products and Zyn is nowhere to be found (https://www.amazon.com/s?k=nicotine+pouches). With MST & pouch sales still a small portion of the overall nicotine market and penetrating into new consumer buckets fast, this whitespace could be filled by rivals utilizing more convenient sales channels than a c-store. Given the stickiness of consumers to pouch brands/flavors, SWMA could lose out on the new basket of consumers buying from Amazon or other online channels. Do you view this as a material risk? But maybe the market is so large and it won't matter since SWMA is generating 233% incremental returns on capital :)
I can definitely speak to the stickiness of the products and how new non-traditional consumers are exploring the pouch products. On a tip from a friend, I recently tried a 3mg pouch and now can't stand to try any other brand/flavor. Prior to trying, I never smoked or dipped tobacco. One last thing - when I read people out there are taking 12mg pouches my jaw hit the floor. That's nuts to me.
Very cool insights Ryan, thank you for sharing your story. At the current moment, c-store's remain the primary distribution channel in America (~97% of OTP sales), and it is unlikely that e-commerce usurps the c-store's dominance in the US. To my knowledge selling on Amazon is illegal, because it does not require age verification. None of the top 5 players - SWMA, Altria, BAT, TPB, or Swisher - seem to have their products listed on Amazon in the US. The regulation is different in Europe, and SWMA does sell via this channel in the Nordics. I hope that was helpful.
Also, 12mg is not that extreme. I know a ton of people personally in Canada (myself included) who used to import Siberia Snus from Sweden (43 mg lol).
Amazing piece! The only thing I'd like to have read more about would be an analysis of the market valuation compared to peers in addition to the chart of Jon and why a multiples rerating of SWMA is not likely.
Gotcha, thank you for the feedback Sönke!
"~0.2% of the TAM is penetrated"
Refreshing to see someone talk about TAM! You'd think it'd be a priority for most authors but its often absent 🤷♂️
How did I miss this
Absolutely brilliant piece.. Matches up very well with my own analysis and a bit of confirmation bias nevers hurt for a beautiful business like this.. Just one question/comment on the terminal value multiple... Have you tried the valuation using a EV/Free Cash Flow multiple instead of the EV/EBIT? And is there a reason you didnt use EV/Free Cash Flow.. Thanks again..
Thanks, extremely good article!
I think you have correctly raised this risk, which could be quite important, which is that if Sweedish Match is the leader in smoke free in Scandinavia (54% marker share), but only has a 15% share of Nicotine Pouches, and the trend is an increasing demand of Nicotine Pouches, and they would be coming from the smoke free alternatives, how will this negatively impact Sweedish Match… is not a negligible part of the current business,
Regards!
Thanks for sharing your insights Anonym!
The dynamics in the Nordic market are a little different than in the US as there are fewer UX benefits to switching to NP from Snus. The only real benefits are no staining of the teeth and no stinging of the gums. Conversely, MST has more UX issues, namely the inability for convenient and discreet usage (i.e., requiring a "spitter").
From most of my communications with my Nordic friends on Twitter, NPs seem to skew more towards new nicotine customers (young adults and Women). The data supports this notion as traditional Snus shipments are still experiencing volume growth (vs. MST which has seen modest volume declines). Therefore, it's fair to posit that cannibalization is less of a threat in the Nordics than in the US. I've included a link to SWMA's latest earnings presentation with a great visual on the composition of smoke-free volumes over time (Snus + NPs).
https://www.swedishmatch.com/globalassets/documents/presentations/2021_q2_interimpresentation_swedishmatch_en.pdf
(see slide 13 for Scandinavian smoke-free volumes)
MST also has a much higher Cancer incidence than Snus
Listened to your podcast and followed you here. Great write-up. As a generalist who has never tried any tobacco products I had to google what the various nicotine products are. Would have benefited from a quick primer and links to the health effects of various options. You will always be amazed about how little some of your readers will know going in! I have a strict ESG policy where I am now allowed to buy any stocks my wife would disapprove too strongly :). This seems like a great way to get exposure to this industry. Love the low beta/economic exposure. And it does seem to trade at a low valuation given the quality and growth runway.
Definitely, I will remember that for the $PM post. Thank you for the constructive criticism!
Great read, can't wait for the next one!
Thank you!
Im sorry but where could I find more info on incremental operating margin? You make a big point out of this but when I look up the smoke-free operating margin and it is 44.8% in Q4 2020.
How did you calculate it to get 99%?
incremental operating margin = [(operating profitT1-operating profitT0) / (RevT1 - RevT0)]
Excuse me for being a baboon but: using 2015 as T0
[(5860-2556) / (11292-6275)] doesn't get me ~99% what is your T0?
You've got to do it YoY for every period
BTW great post! Fucking awesome.
Thank you!
Very thoughtful write up of a fantastic company!
Thank you Paul, I appreciate the kind words!
Great work!
Thank you Stu!
Your compliment means a lot to me!
Is there anything that you think could be done better?