TWNK - Tootsie Roll Industries: Still Expensive Despite Great Performance

2023-05-23 10:20:51 ET

Summary

• Tootsie Roll Industries has seen a significant upside in recent months due to favorable financial results.
• The company's shares appear to be lofty, so investors should tread cautiously moving forward.
• Despite strong financial performance and a solid long-term outlook, Tootsie Roll Industries stock's premium seems too high at the moment, causing me to maintain a "hold" rating.

One of the most iconic brands in the world has got to be Tootsie Roll. Owned by the appropriately named Tootsie Roll Industries, Inc. ( TR ), the brand dates back to 1896, making it one of the oldest confectionery brands still around today.

Over the 127 years that the company has been in operation, a great deal has changed in the candy and snack market. Many brands have been absorbed into larger enterprises. Even so, Tootsie Roll Industries has remained a standalone firm that sells not only its original Tootsie Roll product, but also similar confectionery products like Razzles, Dubble Bubble, Junior Mints, and more.

Over the past few months, driven by generally favorable financial results, Tootsie Roll Industries, Inc. has seen quite a bit of upside. Although this is great for shareholders, it does serve as a warning sign in my opinion. Although this is a high-quality company that will likely continue to be here for the next 100 or so years, shares are looking rather lofty. I wouldn't go so far as to take a bearish stance on the business. But I do think that, as pricey as the stock is, investors would be wise to tread cautiously moving forward.

Great upside as of late

The last article that I wrote about Tootsie Roll Industries was published in August of last year. In that article, I talked about how well the company had done from a fundamental perspective leading up to that point. I stayed in my opinion that the business should continue to perform well in the long run. And I also acknowledged that its share price had moved up in reflection of that.

Even with all of that said, however, I found myself taking a more neutral stance on the business. Because of how pricey shares were, I believed that further upside from that point would be limited. As such, I ended up rating the company a "hold" to reflect my view at the time that shares should generate an upside that would more or less match the broader market for the foreseeable future. Surprisingly, the market had other plans. While the S&P 500 (SP500) is up 4.8% since the publication of that article, shares of Tootsie Roll Industries beat that with an increase of 10.5%.

This is a fantastic move higher for a company that is considered quite mature. However, the move higher was not necessarily without reason. Consider first how the business performed during the 2022 fiscal year . According to management, revenue came in at $687 million. That's 20.4% higher than the $570.8 million the business generated one year earlier. Management attributed this increase to a combination of strong demand and price increases. This combination proved to be very helpful in pushing up the company's bottom line as well. Net income of $75.9 million beat out the $65.3 million reported for 2021. Other profitability metrics followed a similar trajectory.

The one exception was operating cash flow. It declined from $85.3 million to $72.1 million. But if we adjust for changes in working capital, we would see that it increased from $85.5 million to $100.6 million. Meanwhile, EBITDA for the company expanded from $88.5 million to $134 million.

Strength for the company on both its top and bottom lines largely continued into the 2023 fiscal year. During the first quarter , revenue came in at $162.1 million. That's 15.3% above the $140.6 million reported one year earlier. Even in the rather developed U.S. market, financial performance for the company was rather robust, with sales jumping 14.3% year-over-year thanks in large part to marketing campaigns initiated by the company, strong demand for its products, and price increases. This increase brought with it higher profitability as well. Net income, as an example, grew from $12 million to $13.4 million.

It is true that operating cash flow went from $16.8 million to negative $7.5 million. But if we adjust for changes in working capital, we would get an increase from $17.8 million to $19.2 million. This is not to say that everything was great. Unfortunately, EBITDA for the company fell from $26.4 million to $18.6 million.

Tootsie Roll Industries, Inc. management has not really provided any guidance when it comes to the current fiscal year. But we do know that this year is likely to be better than last year. Even though we are contending with economic uncertainty, the confectionery market is forecasted to grow. According to the National Confectioners Association, overall chocolate sales in the U.S. totaled $23.9 billion last year. Non-chocolate confectionery sales accounted for $15.4 billion. And gum and mint sales came out to about $3.2 billion. All combined, this took sales up to $42.6 billion for the year. A different source believes that, for 2022 through 2027, overall candy sales will grow by about 4.5% compared to what they were in 2022. Meanwhile, Confectionary News, citing Euromonitor projections, stated that the industry should climb to about $54.3 billion in the U.S. by 2027.

If we use data from 2022 and 2021, we can easily value Tootsie Roll Industries. On a price to earnings basis, using 2022 figures, the company is trading at a multiple of 35.4. This is down from the 41.1 reading that we get using data from 2021. The price to adjusted operating cash flow multiple should fall from 31.4 to 26.7. And the EV to EBITDA multiple should drop from 29 to 19.1. These are all great improvements to see.

But Tootsie Roll Industries, Inc. shares do seem quite lofty even after factoring this in. As part of my analysis, though, I did also compare the company to five similar firms. As you can see in the table below, shares of the company are, on a price to earnings basis, more expensive than four of the five competitors that I stacked it up against. Using the price to operating cash flow approach, three of the five firms ended up being cheaper. And finally, when it comes to the EV to EBITDA approach, only two of the five were cheaper.

Takeaway

Relative to similar firms, Tootsie Roll Industries, Inc. does look to be closer to fairly valued. But this doesn't mean that the company makes sense to buy into. Yes, financial performance recently has been promising, and I suspect that the long-term outlook for the business is still quite solid.

But Tootsie Roll Industries, Inc. shares do look lofty on an absolute basis, especially relative to earnings. I understand that Tootsie Roll Industries, Inc. is a high-quality player with a nice chunk of the market under its control, so it does deserve some sort of premium relative to similar companies. But to me, this premium is too high right now. As such, I decided to keep Tootsie Roll Industries, Inc. rated a "hold" for now.

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