This is the tale of two companies -- one that you've probably heard of and one you probably haven't. The first, Tootsie Roll Industries (TR), is a legendary name that many of us remember from childhood. The second, Lancaster Colony (LANC), sounds like a homebuilder in Pennsylvania Dutch country, but is actually an Ohio specialty-foods firm.
TR makes plenty of unforgettable candies, from Tootsie Rolls to Dubble Bubble. But you've probably also consumed many of Lancaster Colony's wares without knowing it, as the firm produces everything from Texas Toast to Marzetti salad dressings.
If you had to pick a winner between these two firms from an investment standpoint, I suspect most people would probably go with Tootsie Roll Industries.
I certainly did several years ago. My presumption was that Melvin and Ellen Gordon, the company's aging majority owners (and CEO and president, respectively) would ultimately look to sell the business.
TR certainly seemed like a great acquisition target for Hershey Co. (HSY) or another foodmaker looking to grow its portfolio, but to date, a takeover hasn't happened. The Gordons hung on, and while Melvin passed away last year at 95, Ellen took over as CEO and is still going strong at age 83. The family still owns more than 80% of TR's Class B stock (which has superior voting rights), as well as about half of the company's common stock.
Unfortunately, TR's performance has stagnated over the years. Revenue has long been flattish, and while the company still generates low-double-digit net profit margins, that's a far cry from the high teens that TR saw in the early 2000s. The stock has done little the past 15 years, yet still trades at 30x earnings.
Executive pay is also a key issue in my view, especially for a company that isn't improving. For example, the Gordons earned a combined $7.7 million in total compensation during 2014. That was down from prior years, but nonetheless begged the question: "Why in the heck would the Gordons even want to sell?"
I finally moved on from the stock several years ago after realizing that the Gordons might never part ways with their cash cow, and that Tootsie Roll should probably be a private company.
By contrast, Lancaster Colony has been an amazing success story for investors. The company has quietly grown its business and rewarded shareholders with 26 consecutive years of dividend increases.
The stock's prices has also more than tripled since 2008, even after counting an 11% hit that LANC took last week after releasing worse-than-expected fiscal-second-quarter earnings.
Shares aren't especially cheap at 22x 2017 consensus earnings estimates, but the company has certainly gotten the job done for investors. Lancaster also isn't afraid to alter its business mix. For instance, the company sold candle business Candle-Lite two years ago to concentrate on food products.
And ironically, Lancaster and Tootsie Roll do have one thing in common -- heavy family ownership. The Gerlach family owns nearly 73% of LANC's shares, and family member John Gerlach serves as the company's chairman, CEO and president.
But a key difference is the size of Gerlach's compensation. Last year, his total pay package came in at just over $1.4 million.
The lessons from this tale of two companies are:
- Remember that a company only has value as an acquisition target if its owners are willing to sell.
- Always pay attention to executive compensation.
- Lastly, it sometimes pays to look for an unfamiliar name -- a stock that's less well-known, but quietly rewards its shareholders. Shiny objects are not always as bright as they appear!