Dear Mr. Berko:
Please give me your thoughts on Tootsie Roll Industries. I've been buying Tootsie Rolls for over 50 years, and until several weeks ago, I did not know that this is a public company. I have enough cash in my account to buy 1,000 shares of Tootsie Roll Industries and will do so if you think it's a good long-term investment.
-KD, Durham, N.C.
Dear KD:
No! Two thousand times "no!" Don't buy this stock!
"Tootsie" is defined as a young woman, especially one perceived as being sexually available. "Tootsie" is also a South African slang word meaning "jackass." Tootsie Rolls were the chewy, chocolaty creation of Leo Hirschfield, an Austrian immigrant who began selling these homemade candies in his New York City shop in 1896.
A dozen years ago, Tootsie Roll Industries (TR-$30) was a candy company incarnate with about $500 million in revenues from sugar-soaked products essential for promoting heart disease, tooth decay in millions of Americans and Type 2 diabetes and preparing America's children for a lifetime of obesity. Today TR is still a candy company incarnate with $500 million in revenues, selling Dots, Charms, Charleston Chew, Dubble Bubble, Junior Mints, Sugar Daddy, Sugar Babies and more. Obesity is an epidemic in the U.S., and it hurts my heart to watch obese parents and their obese children shoving high-calorie foods into their mouths. According to the National Institutes of Health, 39 percent of the U.S. population was considered obese last year, thanks in part to TR's toothsome, delectable, scrumptious, savory and divine candies.
I wouldn't recommend the stock because I think revenue growth (if TR has revenue growth) 12 years hence will have been more a result of commodity inflation and unit price increases than a result of an increase in candy consumption. TR has a sweet 40-plus-item product portfolio, most of which I nostalgically remember from when I was a kid in the 1940s and '50s. For grins and giggles, a close acquaintance (with whom I discussed this column) took his two grandsons (ages 10 and 13) to Walgreens. I joined them. We found the massive candy aisle, and their dad said, "Buy your hearts out." They shopped for 20 minutes, spending $27 and $32, respectively, but the only TR product they selected was a box of elegant Junior Mints. This suggests that TR's marketing is ineffective or its portfolio is getting stale or both. TR needs new products to improve flat-as-pancake revenues.
Management has managed to improve net profit margins in the past dozen years, from 7.9 percent in 2006 to a nice 12.5 percent. That's good! TR has only $7.5 million of debt, which is just 1 percent of capital. The balance sheet remains solid, with nearly $140 million in cash. And since 2006, the board of directors has reduced the number of outstanding shares from 77 million to 64 million, which has had the positive effect of increasing earnings and book value. Even with 15 years of share buybacks, TR's earnings have failed to reach $1 a share, but this year, even with commodity prices increasing by 13.9 percent and manufacturing costs increasing by 3 percent, earnings could reach $1.05 a share. Some say the dividend should increase from 34 cents to 35 cents a share, though that's worth just a bit more than spit on a sidewalk. The cash dividend yields a miserly 1 percent, but TR has also paid a 3 percent stock dividend (for every hundred TR shares you have, you get three shares of common stock) annually over the past 40 years. And stock dividends are not taxable till the stock is sold.
There's little or no organic growth here, though, so TR, with a market cap of $2 billion, needs fresh blood. Management might consider a merger with another snack/candy company-notably, Mars, Nestle, Hershey's, Meiji, Mondelez or Ferrero. Or management might consider developing and marketing new products, such as Tootsie Roll baked beans, Tootsie Roll bologna, Tootsie Roll after-shave, Tootsie Roll soup or Tootsie Roll deodorant. Some of those items could be blockbuster products.
All in all, I'd buy TR's product line, but I have no interest in owning TR stock.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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Published: Thu, Aug 16, 2018
