Thursday, March 22, 2018

A Quick look at Tootsie Roll Industries

Occasionally, I use Finviz to screen for stocks that are at their 52-weeks low. This time round, Tootsie Roll is one of the names that popped up.

tootsie roll stock chart

Tootsie Roll is not an unfamiliar name to me. I have been trying to familiarize myself with the names of consumer staples stocks to invest in, for their "supposedly" defensive characteristics. Often, even defensive investors ignore this counter for a variety of reasons. First, the yield is measly. At ~1% yield, yield-starved investors could find better deals in the market. Second, its growth pales in comparison to its peers. Third, the management team are very private individuals. They do not participate in earnings calls, industry conferences, etc. Thus, market participants have minimal avenues to pursue as to what are the plans the management have for the future as well as the trajectory that the company is taking. There is also the issue of leadership succession. Tootsie Roll is a family-owned business and there is a huge question mark as to whether leadership will be handed over from one generation to the next since pretty much everything is kept hush hush.

Based on what I have read, a couple of years back, analysts have been talking up Tootsie Roll. They identified the company as a potential target of Warren Buffet. Consequently, the PE ratio shot up as investors bought into the narrative that Tootsie Roll could offer as a special situation play.

It is only recently that their earnings multiple is contracting. I have attached their historical PE chart from Morningstar below.

Tootsie Roll Historical PE

According to Morningstar's site, their 5-year average PE is 32.6. Furthermore, Tootsie Roll might appear cheap if you compare the TTM PE of 24.1 against its historical PE trend.

Using data from yahoo finance and some fiddling with R, I got the above dividend history of Tootsie Roll. As mentioned previously, there is some differences in how I compute dividends per annum versus how the company could report it. In my case, I compute payouts in a given calendar year. Tootsie Roll may adopt a financial year that does not coincide with the calendar year. Each bar on the x-axis represents a single year, with the least recent year appearing on the left-hand side of the bar plot.

Dividend growth, from 2000 to 2017, could be described as increases followed by a flatline. Percentage-wise, which cannot be obviously seen from the bar plot, the increases are huge. ~10 % increases from 2005 to 2006 and from 2014 to 2015. 

As one of my investing aims is to look for consistent dividend growth counters in the US, I think I shall give Tootsie Roll a miss for now. Am hoping for a better valuation and a greater margin of safety before parking my money in it.

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