Tootsie Roll: Another Runaway Valuation

By Josh Kohn-Lindquist - September 13, 2012 | Tickers: CMG, PCLN, HSY, TR | 0 Comments

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Stocks with a premium valuation can be found almost anywhere.  From fast growing upstarts to mega-cap powers, the investing arena is filled with wild and often unsustainable valuations.  It is up to investors to do their homework and decide which stocks can live up to the hype.

As we take a closer look at Tootsie Roll (NYSE: TR), I will explain why I don't believe that they will be able to live up to their current valuation.

Tootsie Roll's Sour Valuations

With a hefty P/E of over 34 and a Price to Cash Flow of 23, Tootsie Roll easily qualifies as the proud owner of a hefty valuation.  Furthermore, Tootsie Roll's Book Value Per Share sits at $11.30 while it was only able to earn $.78 a share in the last 12 months.  Using this information, Tootsie Roll's Graham Number can be calculated and it sits at $14, or close to a 50% haircut from its current trading price.  

A Few Things to Consider

With cash on hand of almost $80 million and only $7.5 in debt, the candy maker does have a few things working for it.  Throw in a respectable 1% dividend and things don't seem all that bad until you dig just a little bit deeper:

• While posting Year over year revenue growth of 3% during the last decade, Tootsie Roll has watched its EPS drop from $.96 in 2002 to .78 in the trailing 12 months.  The highest EPS in this timeframe was only $1.17.
• Current P/E of 34 is well above its historical standards over the last 10 years as it was only higher in 2008, largely due to the movement to safer stocks before the recession.  
• Has historically traded with a P/E around 27-28 which implies Tootsie Roll is overvalued by about 30% at the moment.
• Using Priceline (NASDAQ: PCLN) and Chipotle (NYSE: CMG) as a comparison, with 26 times earnings and 39 times earnings respectively, it is easy to see that Tootsie Roll's valuation is quite generous as it has no growth story.
• One of Tootsie Roll's main competitors, The Hershey Company (NYSE: HSY), trades at much more attractive valuation as it boasts a P/E of 24, maintains a 2% dividend, and has grown its bottom line by almost 20% every year for the last 5 years.

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