Dueling Fools

The Chocolate War
The Numbers

By Paul Larson (TMF Parlay)
October 27, 1999

Now that Rick has given the rundown on what our two candy titans do, I'm here to appeal to the left side of your brain. Namely, here we're going to take a look at the numbers and see how Hershey and Tootsie stack up.

It's worth noting that because of editing and production concerns, all these figures are as of the close on October 21. Plus, extraordinary gains and the taxes paid on those gains have been backed out of Hershey's net income. Without further delay....











Financial Facts
(millions)               Hershey        Tootsie
Sales                   $4,255.5         $395.5
Operating Income          $612.1         $103.1
Net Income                $334.1          $70.5

Cash and Equivalents       $31.7         $126.5
Current Assets          $1,181.5         $216.7
Total Assets            $3,258.9         $501.4
Current Liabilities       $713.7          $54.7
Total Liabilities       $2,224.4          $93.7
Shareholder Equity      $1,034.5         $501.5
It's fairly evident that Hershey is bigger. However, as the following figures show, that doesn't necessarily make it better.
Operating Efficiency
                         Hershey         Tootsie
Operating Margin           14.4%           26.1%
Net Margin                  7.9%           17.8%
Total Asset Turnover       1.3x            0.8x
Inventory Turns             7.4x           9.1x                   
Days Sales Outstanding  24.7 days       14.2 days
Looking at these common metrics of operating efficiency, it's fairly obvious that Tootsie Roll has a leg up Hershey. Its margins are higher, meaning that it does a better job of turning sales into profits. I was also surprised to see Tootsie's net margin at 17.8%, which is impressive for any company, but especially notable within the food industry.

Hershey turns its total assets faster, which means that for every dollar sunk into factories, chocolate mixers, and delivery trucks, it sees roughly $1.30 in annual sales. Tootsie turns its inventory faster, which means it is more efficient at getting its finished product out the door instead of just sitting around. The days sales outstanding, which is basically the size of the company's receivables in terms of days of sales, is also significantly less than Hershey. This means that Tootsie is much more effective at collecting its bills on time -- a sign of strength.

The bottom line with the operating efficiency is that Tootsie seems to look outstanding compared to Hershey.
Financial Efficiency
 
                              Hershey       Tootsie
Return on Assets                10.0%         14.6%
Return on Equity                32.2%         18.2%
Return on Invested Capital      11.8%         17.9%
Looking at the financial efficiency of each firm, it becomes obvious that again Tootsie seems to best Hershey. Tootsie's return on assets (ROA) and return on invested capital (ROIC) are far better, and these are two key metrics that many advanced value investors look at. Having a 17.9% ROIC is also especially good since the company's cost of capital is far below this.

Hershey's return on equity (ROE) is better than Tootsie's because the company has a fair amount of leverage in its capital structure while Tootsie is comparatively debt-free and cash-rich. Hershey does get some points for effectively using a modest amount of inexpensive debt to boost its ROE without really jeopardizing the organization.
Valuation
                              Hershey       Tootsie
Price (10/21/99)               $51.13        $30.25
P/E                             22.0x         20.9x
Forward P/E                     20.3x         17.8x 
Price-to-book                    6.4x          3.9x
Dividend Yield                   2.0%          0.8%
Looking at these common valuation techniques, it looks like the going price on Tootsie's shares is just a tad less expensive than the price the market has slapped on Hershey. Perhaps Hershey is in a better strategic position or maybe investors are more familiar with the Hershey brand names. But whatever the reason, Tootsie seems to carry the slightly lower valuation.
Growth
                              Hershey       Tootsie
Five-year Sales                  4.9%          8.4%
Five-year EPS                    7.3%         14.8%
Five-year Dividend Growth       10.1%         21.5%
Yet again we find an area where Tootsie is beating Hershey by a healthy margin. However, it is worth noting that Hershey earlier this year sold its pasta business in order to concentrate on its core candy business. This has put the brakes on its top-line growth.

Looking at the past growth of these companies, the consistency in the growth is something to behold. One would have to go back to 1988 to find a year where Hershey didn't have a year of sales growth. My data only goes back to 1987, but over the past 12 years Tootsie has increased both its sales and net income in each and every year. Granted, the growth in both companies has been fairly slow, but few companies have such track records of consistent growth.

The Bottom Line

Looking strictly at the numbers, Tootsie Roll rocks.

Let's now see what Rick thinks would be the better investment of the two companies....

Next: Rick's Goody Bag