Tuesday, October 31, 2006

Update: Tootsie Roll Industries(TR), 3rd Quarter Results, the Gordon’s are Hanging Tough
Tootsie Roll Industries recently reported a decent 3rd quarter. Net sales of $186.4 million were up 7% year over year, while net income of $28.97 million was up 5%. Net profit margin was a healthy 15.54%, but down from last year’s 15.93%.

Our original research on Tootsie Roll focused on the company’s high level of profitability, with admittedly flat sales, in conjunction with our theory that the company would make a great takeover target. This was based not only on the attractive brand name, strong balance sheet, and relatively high profit margins, but also that the majority owners, the Gordon’s (Ellen, President, COO, and Director and Melvin, Chairman of the Board and CEO), who own 40% of the company, are aged 74 and 86 respectively. We surmised that they’d be looking for an exit strategy, and companies such as Hershey’s (HSY) and Wrigley’s (WWY) would be potential suitors.

Fast forward 2 years, and not only are the Gordon’s still in control, they’ve made a major acquisition (Concord Confections), and if Sifel Nicolaus analyst George Askew (who has a hold rating on the shares) is correct, the company may be in the market for the New England Confectionary Company (NECCO), maker of NECCO wafers, Clark Bars, and one of your editor’s old-time favorites, the Sky Bar. Askew suggests that NECCO owner UIS Corp may have the company on the block, in the $150-$200 million range. NECCO 2005 sales were $80 million.

Looks like the Gordon’s are not slowing down, but rather trying to build their brand. More power to them. We’ve been wrong before. We continue to hold Tootsie Roll shares, and still believe that ultimately, the company will be acquired. While the valuation from a p/e perspective does not seem compelling at 23 times earnings, this is a high profit margin business, which should trade at a premium. Healthy amounts of cash, ST and LT marketable securities in excess of $100 million, and little debt complete the picture.

Previous Tootsie Roll Research:

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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