It's been ages since I thought about Tootsie Roll Industries (TR) , in fact I dismissed the name back in 2012, and have not looked back, having owned it years earlier. Oh, I've consumed a considerable amount of the company's products since then, including the Tootsie Roll that robbed me of a crown days before last June's trip to Montana. That stopped me from eating those great little candies, at least for a while.
The stock is a different story. Back in the day, I thought it would make an excellent takeover candidate, given its strong brand presence. Indeed, there were rumors, but no deal ever materialized. One of the issues was control by the Gordon family, which owns or controls 57% of the company's Class A shares, and 73% of the Class B, which has superior voting rights. CEO Ellen Gordon, age 89 is still at the helm as CEO. She took over that role when her husband Melvin Gordon passed away at age 95 in 2015.
What had been a great company has continued to see its revenue stagnate. Revenue last year was $471 million, and has not been above $540 million since 2015 - 10 years ago, in 2011 it was $532.5 million. Net profit margins, which had been as high as 15% in the 2004-2005 era are now in the 12% range. Still, all these years later, TR continues to command a higher price earnings ratio then it should, currently trading at 37x trailing earnings. Forget about forward earnings estimates, no analysts currently cover the name.
For its part, the balance sheet is fairly solid. TR ended its latest quarter with $422 million, or just over $6 per share in cash and investments, and just $8.5 million in debt. The company has reduced shares outstanding by about 9% over the past seven years. The stock currently yields 1.1%, and the dividend has grown at 3.6% CAGR over the past 10 years. In addition, TR pays a 3% annual stock dividend to shareholders.
Executive compensation has been an issue, in my opinion, anyway. Despite stagnant revenue, and declining profits for what should be a growing company, CEO Ellen Gordon made $4.88 million last year. But then again, she calls the shots, and owns the majority of the stock. Welcome to a family-controlled situation where non-insider shareholders are along for the ride.
I still believe TR would command a solid premium in an acquisition, but am not holding my breath given the family control. Its hard to believe that this legendary company has an enterprise value of less than $1.7 billion. It also has somewhat significant short interest of 21.6%. That's actually down from about 46% back in January. In late January in fact, a short-squeeze pushed shares above $57 intraday on January 27. Shares closed at $31.36 yesterday.
Umpteen years ago, my vision was that TR would be acquired by Hershey (HSY) , or Wrigley. At the time, I thought the aging owners would want out at some point. Yet, Ellen Gordon continues to call the shots at 89.
For shareholders, Tootsie Roll is a case study in the downsides of family-controlled publicly traded situations.