Introduction
Team: We’re sorry it’s been so long since we dropped a newsletter! All future write-ups will now be posted on Substack and emailed as well.
The reason for the lull: unpredictable macro shifts in the market make this style of investing far less reliable. No matter how many container stores we call on the weekends or web traffic reports we rip through, The Fed rules all. We could accurately predict a 20% earnings beat, but when the RFR (risk-free rate) is increasing, valuation fundamentals change for the worse. Suddenly, your killer trade faces hurricane-level head winds.
By writing about this new opportunity, we don’t think the turmoil is necessarily behind us, but it does seem like rates have stabilized and may even fall 2-3 times next year (good for mostly bullish investors like us). Regardless, we’re planning to write a post at least once a month. Not all will be DD (you never want to force a trade!) - some posts will be general investing content, information about alternatives, hot takes, cold takes, and lukewarm takes.
This post, however, is DD. Let’s get into this crazy ZYN trend and how PM 0.00%↑ stands to benefit.
The ZYN Trend
Ready to be shocked? People love nicotine.
ZYN pouches are smoke-less and tobacco-less oral nicotine products. They typically come in circular tins of 15 pouches in 4 different strengths: 1.5mg, 3mg, 6mg, and 9mg, and 10 different flavors. Unlike chewing tobacco/dip, consumers don’t need to spit saliva into a cup to avoid getting sick. Tins can be purchased online, in gas station convenience stores, and anywhere else tobacco is available. The brand is operated by Swedish Match, which is a subsidiary of PM 0.00%↑.
There are similar products, but ZYN has the lion’s share of the market:
Videos tagging ZYN on TikTok have over 300 million views, and it’s continuing to gain in popularity as a Google search term as well.
Wondering why we excluded “Stock",” “Tucker” and “Nelk” from the search terms? Our goal is to distill the trend of consumers searching for ZYN pouches to purchase or learn more. We don’t want the Google trend to reflect investor interest or cultural interest.
Tucker Carlson, former FOX News host and right-wing political figure, is a massive ZYN fan. He’s thrown in a pouch live on several video podcasts this year, and those images have become thumbnails for those podcasts or at least the YouTube shorts. The Nelk Boys, who produce the Full Send podcast (very popular among the 18-30 male demo), gifted Tucker the world’s largest ZYN tin as a YouTube stunt.
Joe Rogan talked about ZYN during a podcast and used a pouch during a separate podcast. The actual tin was shown on camera when comedian Shane Gillis handed it to Joe.
Barstool Sports has mentioned ZYN on several videos as well. There’s no shortage of paid/organic ZYN product placement in popular culture, and the consumer trends speak for themselves.
You Don’t Want this Smoke
My biggest hesitation investing in this trend is a classic social arb problem: ZYN is a brand owned by a subsidiary of a much larger company. It’s not a pure play like our previous trades on TCS 0.00%↑ or LUV 0.00%↑ where the trend we leaned into affects 100% of a company’s market cap (gosh, wasn’t that nice). Our conviction has to be that 1) ZYN revenue is going to grow and 2) ZYN’s revenue growth will make a meaningful impact on PM 0.00%↑ earnings.
On PM’s last (Q3 ‘23) earnings call, CFO Emmanuel Babeau credited ZYN and IQOS (heated tobacco) for the strong quarter:
“We delivered very strong and better than expected performance in Q3, driven by IQOS and ZYN…ZYN continued its exceptional growth with US volumes up by plus 66% in Q3 and over plus 50% year-to-date with a substantial increase in category share.”
He also noted that the share of PM’s revenue driven by smokeless products continues to grow, with the goal of 67% by 2030:
“Smoke-free products made up over 36% of total net revenue in the quarter as we drive toward our new ambition of over two-thirds by 2030, making us substantially smoke-free. In combustibles, we delivered very robust performance with plus 6% growth in organic net revenues, strong pricing and higher category share despite the impact of adult smokers moving to smoke-free product.”
6% growth in combustibles is considered “robust” in PM’s world. With ZYN volumes up 50% YTD, it’s clear smokeless products and ZYN specifically are a big part of PM’s future.
According to PM’s most recent 10-Q, Swedish Match (owns the ZYN brand) makes up ~7% of PM’s net revenue, and about the same % of their operating income.
While 7% might not seem like a lot, the numbers become more compelling when you project what % of PM’s revenue growth will come from Swedish Match. Since ZYN as a % of overall Swedish Match revenue is a bit harder to find, I’ll use a few different growth rates for modeling 2024:
First Nine Months 2022 Revenue = $23.6B → First Nine Months 2023 Revenue (minus Swedish Match $1.8B) = $24.3B (+3% YoY)
First Nine Months 2023 Revenue = $26.1B → First Nine Months 2023 Revenue (assuming +3% all categories): $26.9B
+Swedish Match growing +20% (+3% all other categories): $27.2B (+4.2% YoY)
+Swedish Match growing +35% (+3% all other categories): $27.5B (+5.2% YoY)
+Swedish Match growing +50% (+3% all other categories): $27.7B (+6.2% YoY)
Thinking about ZYN’s impact this way, the Swedish Match segment is likely to drive somewhere between 27% to 50% of PM’s net new revenue next year. That’s more than enough to contribute to either revenue beats (if the analysts are asleep) or high expectations that will allow investors to sell into the pre-earnings run up.
Risks
While our thesis is focused on ZYN, we need to think about all risks to PM. Chief among them is that cigarette smoking rates decrease just about every year. It’s no wonder PM is so focused on selling into a smokeless future!
Companies that capitalize on consumer vices are under constant regulatory scrutiny. We’re not lawyers, but below are a few links on some of the litigation and regulatory issues PM is working through:
Heated tobacco uncertainty blights Philip Morris profit beat
Philip Morris International Wins Stock Suit Appeal Over IQOS
Big Tobacco posts warning signs at 220,000 US stores, wrapping up ongoing lawsuit since 1999
Mass. high court awards $37 million in cancer suit against tobacco maker Philip Morris
The Trade
With a company as large and with as many segments as PM, the impact of a popular product may take a few quarters to be fully realized. It’s also unclear if profit would be maximized by selling after a strong earnings call, or during the anticipation of a beat when options traders tend to be most active.
With that in mind, I’m buying Jan 2025 $100 Calls on PM 0.00%↑ and will accumulate on dips and as time value decays contract prices. I’ll likely sell within the next 2-3 earnings calls, but may take profits earlier if the excitement around ZYN leads to some WSB fervor.
Please remember: this is not financial advice, and the vast majority of our holdings are in index funds, dividend stocks, real estate, farmland, and logistics. This newsletter is meant to educate and entertain!
Besides the issues you flag in this very good write up, PM also has a staggering $40 billion in debt which could be an issue as interest rates climb, their free cashflow has been in significant decline. I think in the best case maybe ZYN just helps them maintain the status quo. Wish there was a pure play here, PM is not a great trading vehicle. PM does pay a nice dividend, but you won't even get that if you are just doing options (unless you go with covered calls). It will be interesting to see how the market reacts to the next earnings report.