Too Old for Trick Or Treat?

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

My daughter finally decided she was too old for trick or treat this year. (I agree a college junior is too old, even if you are petite.) My other child is too old for me to walk her around; she goes with a bunch of her teenage friends. But I love, love, love Halloween and dress up just to jump up from the sofa every three minutes to give out candy to the kiddos.

I always keep a varied selection of Tootsie Roll (NYSE: TR) products, Hershey (NYSE: HSY) candy, and Mars (very privately held) candies. Something interesting happens every year after the bags are filled and the kids and their friends dump out their bags to trade. Maybe you remember the scene in the film “A Christmas Story” when the two young boys gleefully go through their presents under the tree until they both find the socks. Then they scowl at each other and in unison throw them away over their shoulders. That’s exactly what my kid and her friends did every year with the Tootsie Roll products.

The Tootsie Roll products are cheap for giving out, granted, and maybe more people will turn to them to give away, but Tootsie Roll’s brands are old-fashioned, and for the most part so is their management. CEO Melvin Gordon is 92, and his wife and COO, Ellen, is 80. The rest of major management is 59 and older, compared to the average publicly traded CEO who is in his/her fifties. Please do not accuse me of being ageist; I have an octogenarian friend who runs a very successful business that she tends to daily, thank you very much. The company was founded in 1896 and while they have grown and added brands since then, only their Blow Pops and new caramel apple Tootsie Pops are novel in the twenty first century. Mostly they offer older names like Charleston Chews, Tootsie Rolls, Tootsie Pops, Dots, Junior Mints, Sugar Daddy, Dubble Bubble and grown up candies like Andes mints.

This is a make or break time of year for confectioners like Tootsie Roll and Hershey’s and the strength of the consumer is important; whether families feel generous enough to give away “the good stuff” or just turn off their porchlights.

Tootsie Roll has a yield of 1.20% (on a payout ratio of 40%) and compared to the 20% rise of the S&P 500 over 52 weeks, is only up 6.77%, making it not exactly a growth or value name at a P/E of 34.75. Tootsie Roll has been discussed as a takeout opportunity but I see this as a very tight-fisted, entrenched company, very set in its ways with an “old” image. 

It trades just over 100,000 shares a day and the short interest has increased to 16.10% in the last month. It reports on Oct. 22 but that of course, won't include any Halloween purchases.

Competitor Hershey’s is actually two years older but far more spry for trick or treating. It has been buying new brands and reaching out to health devotees with organic chocolate and offering more popular brands in single serve sizes, a campaign that is working surprisingly well. It is also seeking out the gourmet aficionados with their purchase of Scharffenberger chocolate and a macadamia nut company. The company also updated some of its manufacturing facilities in Pennsylvania.

In particular, Hershey's is trying to catch up with Mondelez after their CEO Irene Rosenfeld pretty much snatched all the Cadbury's treats right out from under Hershey's nose in 2010. (This was when Mondelez was still part of Kraft Foods). In September they agreed to buy out their remaining stake in Godrej Hershey, formerly a joint operation between Hershey and Godrej Foods in India. This is yet another purchase by Hershey's to expand its global presence to compete with Nestle and Mondelez International (NASDAQ: MDLZ).

Hershey's has a more reasonable P/E of 24.00 than Tootsie Roll and a much larger market cap of 16.00 billion. It also has a slightly larger yield of 2.10% (on a payout ratio of 49%). Its rise in share price is basically even with the S&P 500 but since 2009, the stock has more than doubled and it has become a Wall Street sweetie.

One thing that is sour about Hershey's is its total debt of 2.0 billion to total cash of 589.78 million but a great deal of that is attributable to increased promotion, that manufacturing upgrade, and recent purchases including Brookside Foods and the India Godrej buyout.

It's very close to its 52 week high of $73.42. It has somewhat slowed this year's share price growth trajectory as the entire market pulled back.

Now that Kraft has spun off Mondelez, the international snack division, it becomes easier to compare these candy companies. However, Mondelez has not had its first earnings release since its IPO spinoff. That comes on October 29 and will probably be hotly anticipated as former Kraft shareholders and new investors decide to go with Kraft Foods, the grocery division, or the international snacks of Mondelez. Those snacks include Lu biscuits, Jacobs coffee, Oreo, Nabisco, Cadbury's, Trident, Tang, and Tassimo coffee pods.

CEO Irene Rosenfeld has been busy again as Mondelez just agreed to buy Vitasnella, an Italian snack division of Danone, this just weeks after the debut. Mondelez isn't really a Halloween giveaway (at least not in the US) candy company although the Oreo cookies are welcomed by kids. Mondelez' products are really more sophisticated and the strategy is to maintain the European fan base and push into emerging markets like China and India. Mondelez is generally considered by analysts to be the growth name of the two split companies but Hershey's is really giving them a run for the money as both race to buy up international snack companies, a lot like the way kids run down my street on Halloween night.

Here's Your Treat Takeaway

I still like Hershey's the best and I'd want to buy it before the early 2013 earnings release which should show good holiday sales. While analysts keep saying Mondelez is the growth name, without a single earnings release yet, I'd rather wait for "the good stuff." As for Tootsie Roll, you can hardly give it away. The company is in dire need of some young blood (vampire, maybe?) and I would advise against buying it. In any case, enjoy your Halloween and be generous to the kids. 




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