Tootsie Roll Industries, Inc. (NYSE:TR) is a family run business that is running into headwinds, such as dietary concerns about consuming sugar and a transition from brick and mortar to online shopping. The quantifiable result is a slowing revenue stream.
Revenue has been virtually flat or declining since 2012, as is shown in the chart below.
The majority of stockholder's voting rights for Tootsie Roll are held by the Gordon family. If the family makes poor decisions with regard to navigating the company through a rough patch in the candy industry investors may be left holding the bag. Here is the what you need to know.
Earnings growth can't be sustained if sales keep going down
The company can legitimately claim it is growing its earnings despite slowing sales by reducing its costs. Net earnings as a percentage of product sales have risen steadily over the past five years.
At some point, that formula for generating profits simply runs out of gas. The company needs to grow the top line if it wants to succeed long term.
The other factor contributing to rising annual earnings per share (EPS) is the company's share buyback program that has steadily reduced the share count.
The company has a high valuation
Tootsie Roll does not come cheap. It trades at a P/E of 33. For a company that has declining sales, that's a lot. Its price-to-sales ratio, which is over four, is about as high as it has been in the past 10 years. The reason the price is so high may be the result of two factors.
The first is speculation that the Gordon family may be inclined to sell the company. Even if that's true, that doesn't mean the shares will be bought at a premium.
The second factor is the small number of shares that are not controlled by the family and are part of the public float, or shares available to be purchased on the stock market. Today there are slightly over 22 million shares of the 62 million shares that comprise the company that trade in the public markets. This can create a supply-to-demand ratio that helps bolster the share price.
About 25% of the publicly traded shares, the float, are short for Tootsie Roll stock. Meaning many investors are bearish on the prospects for this company.
ISS governance score
Like golf, when it comes to an Institutional Shareholder Services governance score, lower is better. When it comes to Tootsie Roll, it's game over when you factor in its score of 8, out of a worst possible 10. The Gordon family has been in charge since 1962 and, through the utilization of two classes of shares, can do just about anything it wants with the company.
Below is a chart showing the ownership stake in the company that is controlled by the Gordon family. Class B common shares get 10 votes for every common share.
|Share type||Share Count||Entitled Votes||Family Ownership of Votes||Family Ownership Percentage of Votes|
|Class B common stock||24,208,690||242,086,900||200,102,250||83%|
|Total share count||61,814,410||279,692,620||219,810,147||79%|
If the numbers are not enough to make your hair stand on end, the lack of transparency may be. There are no quarterly conference calls, interviews with the CEO, or questions for management to answer.
The company is run by Mrs. Ellen Rubin Gordon, who is now 85 years of age. Her father ran the company from 1948 to 1962. She then took control of the company in 1962, and her husband took the reins as the CEO until his passing in 2015.
Best to look elsewhere for something sweet for your portfolio. The stock trades at a rich valuation, and the company simply lacks the top-line growth and investor transparency to make any sense to own. Tootsie Roll is a pitch you simply do not want to take a swing at.