Tootsie Roll: How Sweet It Is

Core Viewpoint - Tootsie Roll has shown improved execution and results since 2020, yet its share price remains stagnant, reflecting an undervaluation despite solid fundamentals and a strong dividend policy [1][11]. Company Overview - Tootsie Roll Industries, Inc. was established in 1896 and is a prominent producer of candy and chewing gum in the U.S., Canada, and Mexico, with well-known brands such as Tootsie Roll, Blow Pops, and Junior Mints [2]. - The company is controlled by Chairwoman and CEO Ellen R. Gordon, who holds approximately 57.1% of common stock and 84.5% of Class B shares, granting her majority ownership [2]. Revenue and Earnings Growth - Revenue and EPS were stagnant or declining prior to the pandemic, with a significant drop during COVID-19 due to social restrictions and supply chain issues; however, sales have rebounded since then [3]. - The company has experienced a surge in consumer demand for candy and chocolate from 2020 to 2023, aided by increased store traffic and a return to normal social patterns [3]. Financial Performance - Tootsie Roll's revenue reached a record $769.4 million in 2024, driven by price increases to counter inflation, although sales are expected to decline in 2024 due to consumer resistance to higher prices [4]. - Diluted GAAP EPS reached $1.28 in 2023, the highest in a decade, following a low of $0.79 in 2020, indicating substantial improvement [4]. - Despite a projected decline in sales, management's efforts to restore margins and improve manufacturing efficiencies are expected to stabilize profits [4]. Competitive Landscape - Tootsie Roll faces challenges in a confectionery industry dominated by larger competitors like Hershey, M&M Mars, and Nestle, limiting its ability to introduce new products or pursue M&A opportunities [6]. - The company has successfully navigated inflationary pressures and is currently more profitable than before the pandemic, although top-line growth remains a challenge [6]. Competitive Advantages - Tootsie Roll's iconic brands and strong consumer loyalty provide a competitive edge, alongside a robust balance sheet with no long-term debt and $130.12 million in cash and equivalents [7]. - The company typically performs well during economic downturns, maintaining revenue stability during past recessions [7]. Dividend Analysis - The decline in share price has resulted in a dividend yield of 1.21%, which is above the 5-year average of 1.05%, complemented by an annual 3% stock dividend [8][9]. - Tootsie Roll is recognized as a Dividend King, with a 58-year streak of dividend increases, supported by a modest payout ratio of 26% based on estimated 2024 EPS [9]. Valuation - The current share price is approximately $29.72, significantly below the estimated fair value of $40.80, indicating that Tootsie Roll is undervalued [10]. - Sensitivity calculations suggest a fair value range between $39.44 and $42.16, with the stock price representing about 70% to 75% of the fair value estimate [10]. Final Thoughts - Despite a flat share price over the years and concentrated ownership, Tootsie Roll's improved performance post-pandemic, attractive dividend policy, and competitive advantages make it a compelling long-term investment opportunity [11].