Turning Point shares rally after company says it’s giving up on third-party vaping business

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Shares of tobacco products maker Turning Point Brands Inc. soared 25% Friday, after the company said it’s reviewing its strategic options for its third-party vaping business.

The negative headlines that have swirled since late summer amid an outbreak of a severe lung injury stemming from vaping has “dramatically disrupted” that business, said the Louisville, Ky.-based company TPB, +20.89%, as it reported better-than-expected third-quarter earnings.

The Centers for Disease Control and Prevention says 1,888 Americans have been sickened with the illness so far and 37 deaths have been confirmed. All patients reported using e-cigarettes or vaping products and most said they had used products containing THC, the psychoactive ingredient in the cannabis plant.

Most of those who have fallen ill obtained the products on the black market or from other informal sources and not from cannabis stores in those states that have legalized cannabis for medical or recreational use.

“Management believes the expected future returns from third-party vaping distribution may no longer justify the required investment of human and financial resources going forward,” the company said.

Read also: Vape sales are falling on fears about the outbreak of vaping-related lung illness

The board has started a review of the business and will repurpose infrastructure to support sales of CBD-related products instead, or those containing the non-psychoactive ingredient in the cannabis plant that is widely held to have wellness properties, although there has been little clinical research to support that view.

For more, see: An entire industry is being built around CBD, but we really don’t know that much about it

To offset the loss of third-party vaping distribution, Turning Point will speed up planned cost cuts which are expected to deliver $8 million to $10 million of annualized savings. Those cuts will mostly come from warehouse and business consolidation.

Meanwhile, the company’s third-quarter earnings blew past estimates as sales of smokeless products and new-generation products rose more than 20%.

Read: Lawsuit alleges Juul knowingly shipped 1 million contaminated pods

Related: Over 50 people have been poisoned by a vape called ‘Yolo!’

The company posted net income of $6.3 million, or 31 cents a share, down from $7.9 million, or 40 cents a share, in the year-earlier period. Adjusted per-share earnings came to 56 cents, a full 10 cents a head of the 46 cents FactSet consensus.

Sales rose 16.1% to $96.8 million, also ahead of the $78.0 million FactSet consensus.

Smokeless sales rose 20.4% to account for 27% of overall sales, while smoking sales rose 7.6% to account for 31% of overall sales. Zig-Zag rolling papers held on to their leading share of the premium market as organic hemp, unbleached papers and new paper cones performed strongly.

See now: Philip Morris and Altria merger talks are off as Juul CEO steps down amid vaping fears

New-generation sales rose 20.5% and accounted for 42% of overall sales. Nu-X Ventures, a subsidiary set up to capture a share of the market for CBD and other emerging alternatives, saw sales climb to $6.3 million from $4.3 million in the second quarter. Vaping system RipTide started the quarter in 9,000 stores and have expanded to about 16,000 by quarter end.

The company is now expecting full-year sales of $361 million to $367 million, compared with a FactSet consensus of $339 million.

Shares have fallen 4.4% in 2019, while the S&P 500 SPX, +0.75%  has gained 21% and the Dow Jones Industrial Average DJIA, +0.89% has gained about 17%.

See also: Former smokers are picking up some terrible habits that pose major health risks