Tootsie Roll Industries (TR): Shares Priced to Perfection
While Tootsie Roll Industries (TR) has come down from its 52-week high of $35.00 shares still look richly valued. Upon the Wrigley merger with Mars earlier this year and Mario Gabelli laying out his thesis that Tootsie was a takeout target in Barron’s Spring 2008 Money Manager Round Table, shares have been bid up in anticipation of a change in control. However, this change in control premium is largely priced into TR shares at this point.
Tootsie still trades at 16.3x ttm EBITDA, a significant premium to its median peer group and median historical transaction multiples, leaving little upside left in the shares. The forward earnings multiple of 31x 2009 EPS also seems rich considering that Tootsie Roll is a mature company in a mature industry, while Tootsie Roll’s current industry position makes a premium multiple difficult to justify. Talks with investor relations revealed that the company is unable to raise prices unless larger competitor’s such as Hershey’s (HSY), Mars, or Nestle (NSRGY.OB) do so first. While Tootsie has a number of brands, brands alone do not constitute a competitive advantage unless those brands make customers willing to pay higher prices. The company’s largest customer, Wal-mart (WMT), also has strong buyer power and accounts for 22% of sales. Input prices have come down, but this is more a result of weakened demand, not a significant increase in supply.
Investor relations also said that the company has experienced difficulty growing via product extensions and marketing over the past few years. In 2001, the company began to slow, with the first drop in sales in 24 years of -13% and first drop in earnings in 19 years of -1.3%. Recent product additions that have been recently rolled out, such as the Charms Maxxed Energy Lollipop, haven’t improved results. The company says that it is still trying to roll out this product, which has seen mediocre sales, but new candy products can be difficult to market as people tend to stick with their favorites.
The dual share class structure and the Gordon’s control of Tootsie provides another obstacle to any potential deal. Melvin Gordon, 88, has been a director of TR since 1952 and chairman of the board since 1962 and also serves as CEO. Ellen Gordon, 76, has been a director of TR since 1969 and President since 1978. The Gordons own 52% of common shares and 76% of class B shares.
Assuming $72M in 2009E EBITDA and median peer group and transaction multiples, Tootsie Roll shares are valued between $14-$20.
EV/EBITDA Multiple: |
Peer Group- 10.16x |
Transaction Multiple- 14.5x |
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TR EV |
732.94 |
1,045.61 |
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Less Debt: |
7.5 |
7.5 |
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Plus Cash: |
59.21 |
59.21 |
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Equity Value: |
784.65 |
1,097.32 |
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Shares: |
55 |
55 |
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Price/Share: |
$14 |
$20 |
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Even this valuation may be somewhat generous. Putting a 12x P/E multiple on next year’s estimated earnings of $.80, where the multiple is based off of a cost of capital of around 12% and terminal growth rate of 3%, gives a valuation of $9.60.
Transaction Multiples
Goldman Sachs Analysis |
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Selected Transactions |
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Acquirer |
Target |
Date |
The Gillette Company |
Duracell International |
1996 |
Newell Company |
Rubbermaid |
1996 |
Phillip Morris Companies |
Kraft |
1998 |
Procter & Gamble Co. |
Iams Pet Food International NV |
1999 |
Unilever plc |
Bestfoods |
2000 |
Phillip Morris Companies |
Nabisco |
2000 |
General Mills Incorporated |
Diageo, Pillsbury |
2001 |
Kellogg Company |
Keebler Foods |
2001 |
PepsiCo, Incorporated |
Quaker Oats |
2001 |
Nestle SA |
Ralston Purina |
2001 |
Procter & Gamble Co. |
Clairol |
2001 |
Masterfoods France |
Royal Canin SA |
2001 |
Cadbury plc |
Adams Confectionary Business (Pfizer) |
2002 |
Procter & Gamble Co. |
Wella AG |
2003 |
Wm. Wrigley Jr. Company |
Kraft (Certain Sugar Confectionary Assets) |
2004 |
Procter & Gamble Company |
Gillette |
2005 |
Johnson & Johnson |
Pfizer |
2006 |
Nestle SA |
Gerber |
2007 |
Kraft Foods Inc. |
Danone (Biscuits and Cereal Business) |
2007 |
Group Danone |
Koninklijke Numico NV |
2007 |
Pernod Ricard SA |
V&S Vin & Spirit AB |
2008 |
Novartis AG |
Alcon Incorporated |
2008 |
Selected Transactions |
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EV as a Multiple of: |
Range |
Median |
LTM Sales |
1.2x-7.4x |
2.70x |
LTM EBITDA |
10.7x-21.2x |
14.50x |
Peer Group Multiples (12/12/2008 )
Peer Group |
Ticker |
Market Cap |
EV/EBITDA |
Campbell Soup Company |
CPB |
10.24B |
8.45x |
Dean Foods Company |
DF |
2.35B |
8.45x |
General Mills Inc |
GIS |
20.51B |
10.16x |
Hershey Company |
HSY |
8.1B |
9.86x |
J & J Snack Foods Corp |
JJSF |
572.86M |
7.24x |
Kraft Foods Inc |
KFT |
39.61B |
9.27x |
Lancaster Colony Corp |
LANC |
910.85M |
10.24x |
Lance Inc |
LNCE |
655.09M |
13.79x |
McCormick & Company |
MKC |
3.83B |
10.56x |
Ralcorp Holdings |
RAH |
3.08B |
15.66x |
The JM Smucker Company |
SJM |
4.87B |
15.88x |
Mean |
10.87x |
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Median |
10.16x |
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High |
15.88x |
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Low |
7.24x |