Tootsie Roll is a Sweet Investment or Takeover Target

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tootsie Roll (NYSE: TR), the candy maker, is a unique entity in that it has the oldest chief executive officer of a publicly traded company.  The company is not operated as efficiently as competitors such as The Hershey Company (NYSE: HSY).  This makes Tootsie Roll appealing both as a long term investment and as a potential takeover candidate when there is a change in executive leadership.

Tootsie Roll manufactures and sells Tootsie Rolls, Charm Pops, Sugar Daddy, Charleston Chew and Sugar Babies, among many other well-known items easily recognizable on the shelves of Wal-Mart and other stores.  For these, sales growth is up on a quarterly basis by 3.14%.  That is an improvement for the five-year average of 1.22%.  By contrast, Kraft Foods (NASDAQ: KRFT), which makes Oreo cookies and Cadbury chocolates, has sales growth declining by 4.27% for the quarter.

Tootsie Roll, however, is not as profitable as Kraft Foods or Hershey's.  For Tootsie Roll, the profit margin is 6.88%.  Hershey's has a profit margin of 9.59%.  The profit margin for Kraft Foods is also much more profitable than Kraft Foods.  The profit margin for Kraft Foods is 7.75%.  That is appealing to investors as it evinces the upside potential for Tootsie Roll under new leadership.

 

<img src="http://media.ycharts.com/charts/a053097998bad6b6b0c7c8b92936670b.png" />

TR Profit Margin data by YCharts

What also makes Tootsie Roll attractive is that it carries much less debt than Kraft Foods.  Kraft Foods has a debt-to-equity ratio of 0.84.  That means it required 84 cents in borrowing to create every one dollar in shareholder value at Kraft Foods.  Tootsie Roll is virtually debt free with just an .001 ratio.  Such a minuscule debt-to-equity ratio makes Tootsie Roll very attractive as a takeover candidate in a mergers and acquisitions transaction.

Tootsie Roll also has the high cash flow that appeals to investors whether an individual buying for the long term or a company looking to expand its product line. The current ratio, a liquidity measure based on the ability to pay short term debt, is very strong at 3.412.  A current ratio of around 1 is adequate.  

Another component of the cash flow posture that attracts investor attention to Tootsie Roll is its dividend income.  Tootsie Roll has a dividend yield of 1.27% with a dividend payout ratio of 40.18%. There is ample cash flow to allow for dividend growth, a stock repurchase progras to reward shareholders in the future; or to help finance a takeover.

The chief executive officer is 92 years old, the oldest currently for any company on The Big Board or NASDAQ.  It is difficult to see how new executives could not do better than the current management at Tootsie Roll. The operating margin has fallen by about one-third in recent years for Tootsie Roll.  The operating margin for Hershey's is about 70% better.   The inverse trending of the operating margins of Tootsie Roll and Hershey's certainly makes the case for better management at the former.  From the chart below, it is tough to imagine Tootsie Roll not prospering under new management!

 

<img src="http://media.ycharts.com/charts/1a5a97ee7d671624ac0495400b39fbb7.png" />

TR Operating Margin TTM data by YCharts

Due to the executive team now in place, Tootsie Roll is regarded in a very negative manner by the investment community.   As a result, the mean analyst rating is the worst possible of a 5, which is a Strong Sell.  The short float is 14.31%, with one of 5% considered to be troubling.  There is practically no short float for Hershey's, just 1.31%.  Average volume for Tootsie Roll is under 100,000 shares a day.  For Kraft Foods, it is close to 12 million.  That lack of activity (and interest) in the stock also demonstrates the poor relationship that Tootsie Roll has with the investment community.

Over the last quarter, Tootsie Roll is up 17.31%, riding the summer rally like so many other stocks.  At $26.75, it is trading at its high for the last 52 weeks of market action.  The low debt, high cash flow and solid business model with products that have a basic appeal to consumers are certainly there for Tootsie Roll to tempt long term investors for the stock or buyers for the company.

    

 


 

Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus