By Jack Hough

If you don't know your snuff from your snus, I can help. Not that I'm so experienced: I've only put tobacco under my lip once, in the early 1990s as a stockbroker trainee at a big wirehouse. The other 20-somethings were wearing headsets and throwing a football around the bullpen while spitting into plastic cups and cold-calling locals about a municipal bond fund. I joined in. My spiral was as wobbly as my sales pitch, and I've never been a confident spitter. My calls couldn't have gone worse if I added a unicycle and juggling pins.

That was dip, which is finely chopped tobacco that has been cured and fermented. It's sometimes called moist snuff. There is also dry, powdery snuff that historically was snorted but now is more commonly put in the mouth. Chewing tobacco refers to the shaggier stuff sold loose or arranged in plugs, twists, or bits.

I've been reading up because the hottest thing from Big Tobacco in years is neither hot nor tobacco, but rather nicotine pouches called Zyn. Owner Philip Morris International has outrun the S&P 500 index by 50 percentage points over the past year. More on that in a moment.

To understand Zyn, we must briefly touch on snus, which is pronounced like moose, and comes loose or in pouches. Like dip, it's tucked between the lip and gums. Nicotine is transmitted to the bloodstream through "oral mucosa," explains Philip Morris on its website, which "should not be confused with saliva." It isn't exactly a tagline worthy of Mad Men, but OK. The point, I think, is that snus users don't spit. The tobacco is pasteurized, which kills bacteria.

Snus is beloved by male Swedes, and apparently loathed by female ones, who don't care for the strong tobacco taste or teeth staining. This is according to an article in the New Yorker magazine -- one of several recent media examinations of Zyn culture. A top snus maker, Swedish Match, designed a version with women in mind where tobacco is replaced with synthetic fillers, added nicotine, and flavoring -- mint, citrus, and so on.

Zyn entered the U.S. in 2014 and became a hit with young, manly men, to the amusement of Swedes and the intrigue of Philip Morris, which bought Swedish Match in 2022. I'm not an expert on gender politics, or politics politics. But a GQ story from January explains that Zyn isn't just for "cowboys or fishermen," or for people who voted red or blue. It's for athletes, gamblers, Excel jockeys, club goers, and so on.

One group that Zyn is not for, Philip Morris is careful to explain on its website, is quitters: "While nicotine gum is widely recognized as a cessation aid, nicotine pouches are not, and should be used by adult smokers who would otherwise continue smoking cigarettes." When I tell you in a moment about the profit margins, that stance will make more sense.

U.S. smoking rates just hit an 80-year low. That's Altria Group's problem, but Philip Morris' opportunity. Recall that the old Philip Morris, with its dominant Marlboro cigarette brand, changed its name to Altria in 2003, then spun off its majority stake in Kraft Foods in 2007, along with its overseas tobacco operations. The idea was to give investors exposure to cigarette growth markets without the U.S. lawsuits. But smoking is now in decline in much of the world.

Both companies needed some smokeless answers. Altria bought UST and its Copenhagen snuff in 2009. It took a bath on a 2018 investment in e-cigarette maker Juul Labs, which earned scorn from regulators after flavors like crème brûlée became popular with teens. Two years ago, Altria invested in another e-cig start-up called NJOY Holdings. Its flavors are tobacco and menthol -- with no plans for tutti-frutti, I'm guessing. One problem with e-cigs is that YouTube is filled with videos on how to make your own vape juice. Sounds unwise -- and bad for business. An estimated 60% of vape products are illicit.

Philip Morris International went the heat-not-burn route with a device called IQOS. It heats rolled tobacco sticks, which greatly resemble cigarettes, to release a nicotine aerosol for six minutes or 14 puffs.

Americans might feel like IQOS hasn't caught on, but in fact, Philip Morris says it did more than $11 billion in revenue worldwide last year, making it as big a seller as Marlboro cigarettes. It's just that the U.S. rollout was held up by patent litigation with British American Tobacco, which has a heat-not-burn device called Glo. The two companies settled a year ago. Altria, which had an agreement to sell IQOS in the U.S., sold that right back to Philip Morris.

Meanwhile, Zyn is already up to $2 billion in U.S. revenue. If American smokers switch to Zyn rather than IQOS, I don't think Philip Morris will mind. BofA Securities reports that Zyn's revenue per 1,000 units is six times that of cigarettes, versus 2.2 times for IQOS. Gross profit margins for Zyn are eight times those of cigarettes, versus 2.4 times for IQOS. If you had a fast-growing product with those metrics, you might be more excited about oral mucosa, too.

When Philip Morris boasts that smoke-free revenue is about 40% of total revenue, it's not just looking for a pat on the head from do-good scorekeepers. It's aiming for 67% by 2030. BofA notes that the company had one of the most positive presentations at a recent consumer staples powwow. Sales are growing by high-single-digit percentages, and profit margins are expanding.

There are concerns. Other tobacco players are piling into heat-not-burn and nicotine pouches. It's difficult to tell how much of the stock's recent rise is Zyn-thusiasm, and how much is a flight to staples amid a tech selloff.

Meanwhile, Philip Morris International shares, at a market multiple of 21 times earnings, look a little too loved. Even bullish BofA's price target implies only 9% remaining upside, plus the 3.6% dividend. Call it a back-burner idea, or at least something to chew on.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

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March 14, 2025 21:30 ET (01:30 GMT)

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