Tootsie Roll (Industries) I Think I am in Love with You!

Tootsie Roll Industries:

Not as Sweet as I Thought

    Initially I had thought that Tootsie Roll Industries (NYSE: TR), the maker of many popular candies such as Tootsie Rolls and Pops, Caramel Apple Pops, Double Bubble, and 21 other brands, was going to be something Warren Buffet would be proud to invest in (even though he already owns See's Candies)...Profitable and growing at a slow and steady pace. To some extent that is true, if you take into account a time period from 1978 through today which gives you a return of 15,317% (excluding dividends). This exceeds the 1,916% return of the S&P 500 (index which tracks the top 500 public companies), and also trumps their leading competitor, Hershey (NYSE: HSY), 10,994%.

TR vs. HSY vs. S&P 500 1978-Present

However, over that time period TR has acquired numerous confectionery companies and hasn't developed an in-house candy in a while. Organic developments, innovations they develop in their own company, usually cost them less and show that they are dedicated to innovation.  In large part their rise in share prices correlate with their acquisition of other companies which allows them to inorganically increase their revenue.   

Although that recap is from the past, it gives you a historical analysis to help create projections for the future. TR’s last acquisition was Concord Confections in 2004, and the share price has only risen 23% since then. While I haven't dug into the weeds on it, I don't foresee any new acquisitions or major developments in future product lines. This I believe is jointly due to a small market share owned by TR, and their lack of extremely popular products other than the Tootsie Roll and TR Pops. This leaves the burden of creating increases in revenue solely up to the growth in candy consumption in the U.S. (the majority of sales occur there) and their ability to market antique candy brands. It also leaves the increase of net profit to commodity prices and business efficiency improvement. While these are very important areas to improve on, the candy industry itself just took a PR hit when the U.S. Government released new health guidelines for sugar intake that demonize the candy and junk food industries. The recent increase in urgency for U.S. citizens to be more health conscious doesn't help TR increase their revenue either.

64 Million Tootsie Rolls are made a day

The past five years, however, have had a positive impact on the company- but not because of an increase in revenue, rather, because of an increase in profit margin that has been driven by business efficiency improvement and a significant drop in commodity pricing (sugar, corn syrup, cocoa powder, edible oils, and packaging). This increased their earnings-per-share, which made the company very attractive to investors. However, the company has negligible control over the price of these commodities, and if they go up their profit margins will be hurt substantially.

 
Should you take a bite of Tootsie Roll Industries? No. The growth prospectus of the candy industry is moderate, if not poor. If commodity prices rise the EPS will fall, and in the past several years their largest quarter for revenues (Halloween) has decreased, and overall revenues have been flat. If you invest now you are leaving your gains primarily up to the prices of commodities, which rarely proves to be a good idea. I would suggest staying away from the candy industry as a whole. But if you really have to cure your sweet tooth, I would look for a company that is attempting to adapt to current industry trends. It tells you that they are interested in increasing profits through something they can control and not leaving it up to commodity prices. Check out more diversified companies like Hershey, Nestle (VTX: NESN), or Mondelez (NASDAQ: MDLZ) for better prospects in the confectionery industry.