The Problem with Tootsie Roll Industries for the Value Investing Crowd

For more than 15 years, I have watched the Tootsie Roll company and waited for it to be “fairly” valued or undervalued relative to the stable profits that churn out year after year like the chewy candies for which the business is known.  It’s the type of company that I would love to have a long-term investment in that sits on the balance sheet of my operating businesses and compounds over the decades.  In fact, I love the idea of being able to pass on to my grandchildren shares of the company that I bought when I was in my twenties.

The company is managed by the same two people that have been at the helm for 50 to 60 years.  It is quirky – the annual report looks the same each year with the numbers updated, the company pays a cash dividend (current yield of 1.2%), a stock dividend of 3% to represent retained earnings, it repurchases its own stock, it is simple, and has a powerful collection of irreplaceable candy brands.  It is almost like it sprang to life from the pages of Benjamin Graham’s Security Analysis as a living didactic model of corporate management practices and allocation choices.  It is well managed, loved, and stable.

However, the stock has always been too damn expensive!  I mean, I just cannot justify the price.  It is incredibly, amazingly frustrating.  Right now, for example, the company is trading at a 28.5 price to earnings ratio, which amounts to a 3.5% earnings yield – and that is before any taxes that would be owed on cash dividends!  It is literally yielding, on a look-through basis, less than the inflation outlook.  How the hell can people justify paying that price for this business?  The stock has barely fluctuated in price for a dozen years – since 1998.

This isn’t a high growth business.  Anyone buying at these levels is likely (in my opinion) to lose purchasing power or at the very least do poorly over the coming five to ten years because the return you earn on an investment is a function of the price you paid for that investment.  You cannot pay that high of a multiple and expect to do well unless a business is growing at somewhere north of 18%.  I just don’t see how Tootsie Roll Industries is worth more than $500 million given its growth rate.

I want shares.  I’ve been patient to the point that if there were a church of capitalism, I should already be the patron saint of patience.  But that doesn’t mean I like it.  Discipline is doing (or not doing) something because you know it is a wise course of action to achieve your goals and objectives.

Perhaps we should say a prayer.  “Dear Heavenly Father, creator of the universe, please cause Tootsie Roll Industries to trade at 10x earnings so I, and members of my family, can buy truckloads full of the stock, stuffing our retirement accounts and operating businesses full of shares.  I probably won’t ever sell them.  I just want to own them for a long, long time and watch them grow in value.  Amen.”

Related posts:

1. Value Investing vs. Growth Investing
2. The Great Tootsie Roll Fruit Midgee War Of 2011
3. Earnings Yield as a Value Investing Strategy
4. Peak Earnings – A Common Value Investing Trap
5. Tweedy, Browne Value Investing
6. Value Investing from the Goldman Sachs Chief Investment Officer
7. Common Characteristics of Value Investing Stocks
8. Not Every Value Investing Position Is “Buy and Hold”
9. Mr. Market – The Famous Value Investing Allegory
10. Margin of Safety – The Secret Value Investing Strategy