Tootsie Roll (NYSE: TR)
trading at $30.95 as of 10/24/02

I didn't just choose to write about Tootsie Roll(NYSE: TR) because it fits the trick-or-treating theme perfectly, being in the candy biz and all. Instead, I noticed the company's stock price had plunged by more than 30% since I first looked at it, long ago. Recently trading around $30 per share, it has nearly reached its 52-week low, with a P/E ratio of 24. That made me wonder whether it's a bargain now. So I did some digging, and here's what I found:

Tootsie Roll is attractive because:

  • It has a long track record of success. The company is more than 100 years old and sports such tasty brands/products as: Tootsie Roll, Tootsie Roll Pops, Caramel Apple Pops, Child's Play, Charms, Blow Pop, Blue Razz, Cella's chocolate-covered cherries, Mason Dots, Mason Crows, Junior Mints, Charleston Chew, Sugar Daddy, Sugar Babies, Andes mints, and Fluffy Stuff cotton candy.
  • The firm lays out, front and center, a list of admirable principles in its annual report. For example: "We do not jeopardize long-term growth for immediate, short-term results. We maintain a conservative financial posture in the deployment and management of our assets. We run a trim operation and continually strive to eliminate waste, minimize cost, and implement performance improvements." It's hard to argue with that.
  • It has a great dividend policy. You might look at its cash dividend yield of 0.90% and think, "that's nice, but nothing special." But in fact, that's only part of the picture. For decades now, the company has been paying out a 3% stock dividend each year. So the current yield is close to 4% -- pretty nifty. If you start with 200 shares, you'll have 231 shares in five years. In 10 years, 268. In 25 years, a whopping 418 shares.
  • As Paul Larson noted in a 2000 piece on Tootsie Roll, the company (at that time) boasted 23 straight years of sales growth and 18 straight years of net income growth. The firm also had solid gross margins around 50% and net margins above 15%. On average, over the past few years, its return on equity has topped 16%. Tootsie Roll is a powerful cash machine.

There's a cloud associated with all these silver linings, though. It's called fiscal year 2001. After a seemingly unstoppable history of growth, the company faltered, citing economic upheaval following Sept. 11. Its revenues came in a bit short of 2000 levels. Of course, competitors Wrigley(NYSE: WWY) and Hershey(NYSE: HSY) faced the same economy, and both experienced continued growth. And candy isn't exactly the most economy-sensitive product. Even in a depression, people are likely to treat themselves to a confection now and then.

So, 2001 merits some examination. Many of the company's important numbers stalled or sank in 2001. For example:

    1997        1998      1999       2000       2001

Revenues             $376 mil.  $389 m    $397 m.    $427 m.    $423 m.

Net income           $61 mil.   $68 m.    $71 m.     $76 m.     $66 m.

Gross margin         50%        52%       51%        52%        49%

Net profit margin    16.2%      17.4%     18%        17.7%      15.5%

Earnings per share   $1.15      $1.29     $1.37      $1.49      $1.30

Return on equity     17.3%      17%       16.6%      16.5%      12.9%

Return on assets      13.9%     13.9      13.5       13.5       10.6

These figures are far from an indication that investors should steer clear of Tootsie Roll. But they do make me wonder what exactly is or was going on -- and more importantly, whether they're a blip or the beginning of a poor performance trend. I looked to the company's annual report for some answers, and found these statements, among others:

"Our sales results were generally influenced by the slowdown in the domestic economy." (Generally? Was there anything else? Is everything being pinned on factors out of the company's control?)

"2001 earnings were adversely affected by lower sales, changes in product mix, and generally higher operating costs." (This goes a step further, but I'd like to hear more about the higher operating costs.)

"Cash and investments in marketable securities grew by $51 million during the year, placing us in an even stronger position to respond to future investment opportunities, including suitable business acquisitions, as they may arise." (This is a plus. The company bought Andes mints and Fluffy Stuff cotton candy in 2000. So, it's clearly open to sensible purchases.)

Overall, I suspect that if Tootsie Roll hadn't had a weak 2001, its stock wouldn't be at the current low levels. So, although it may seem a shame that the company broke its growth streak, it may be responsible for offering investors a lower price today.

If, like me, you're intrigued by Tootsie Roll as a possible investment, keep an eye on it. Watch to see if sales growth picks up. (Be warned, though -- this is a very seasonal business. Sales typically spike in the third quarter that ends in September, as consumers stock up for Halloween.) Watch other numbers, too, for signs of improvement -- numbers such as profit margins, return on equity, and return on assets. Make sure that accounts receivable and inventories aren't growing faster than sales.

It's true that Tootsie Roll may be a sluggish performer from here on out. But it's just as likely that it has simply hit a temporary bump in the road and will get its act together in the near future. It still has several valuable brands, a robust balance sheet, and more consumers to entice with joys of Tootsie Rolls, Junior Mints, and Fluffy Stuff.

This stock might prove to be a solid long-term performer -- even more so if you can snap up some shares at lower prices in the future. While many companies in complex industries (such as biotechnology and telecommunications) have uncertain futures, you can be reasonably sure that next year -- indeed, even 20 or 30 years from now -- people will still munch on Tootsie Roll's offerings.

To learn more, visit the its website. This critical article in BusinessWeek might also be of interest. Ask questions and collect opinions about the company on our Tootsie Roll discussion board.

Selena Maranjian is smarter than a speeding bullet and faster than a tall building. To see Selena's complete stock holdings, view her profile. The Motley Fool is Fools writing for Fools

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