Dueling Fools
The Chocolate War
Rick's Goody Bag
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Which gauge to engage? Paul has filled up the bulk of the quantitative blanks. But let's say I, on a sugar high, run eclectic. I can conduct some random taste tests, pitting Kiss against Roll, and the richness of Hershey might win over. Or I can lay both out in direct sunlight, where Tootsie Roll will persevere.
In the end, I'll go with the taste test. Hershey is the richer company -- in brands, history, but also, unfortunately, in stock price. While the shares of both companies might seem awfully close in terms of the most common metric, P/E, Tootsie pulls ahead in just about every other step of the way.
On an operating basis, Tootsie has Hershey licked and it doesn't take too many licks to get to the center of Tootsie's pop appeal. While Hershey is logging more than 10 times Tootsie's revenues, it can only muster a bottom line that is less than five times greater. The reason? Margins. Tootsie may be the originator of wrapped penny candy, but it certainly knows how to hold on to those pennies through the business process.
Double-digit net margins are golden, and for Tootsie to produce 17.8% net margins (meaning that for every dollar sold, the company still has almost 18 cents left over, even after the accountant and the tax man have their say) is amazing.
You don't need to consult with Mr. Owl on this one. Tootsie, while smaller, keeps the cleaner balance sheet. You can take Paul's numbers to come up with respective current ratios. By taking the current assets and dividing it by current liabilities, you get a simple snapshot of a company's near-term liquidity. The higher, the better. The score? Tootsie racks up a 4.0 ratio while Hershey musters a 1.7 showing. This does not mean that Hershey is teetering on the brink of bankruptcy. The company sports a healthy tally.
Actually, it can be argued that Tootsie needs to keep that healthier ratio because, being the smaller company, it can be more susceptible to pronounced downturns.
But, this is candy. This is the last line of defensive stocks. Economies will ebb and flow, and big ticket items will fluctuate, but spare pocket change will jingle perpetually. During good times candy will serve as a bonus reward. During bad times it will merely substitute costlier playthings.
That is why both Hershey and Tootsie are compelling. They have shown a knack for growth. It might be the competitive spirit since it is no coincidence that each company had significant acquisitions in 1988. Neither company is running dry on Wonka-esque pure imagination. In recent years Hershey has taken the traditional Kisses chocolate drop and swirled it with white chocolate Hugs. It's Reese's line has been given the Kit Kat treatment as well as chunkier peanut butter. Tootsie has taken its apple-flavored Charms Blow Pop and gone with a Sugar Daddy center to create a Caramel Apple lollipop.
Both companies are proven winners. However, I do have concerns over Hershey in the near term. Selling off its pasta business was a sound strategic move, but is Wall Street ready for a smaller Hershey? The company is pretty richly valued. Also, unlike the cash-hoarding Tootsie, Hershey's leveraged balance sheet has to make one nervous if interest rates continue higher.
That is why I think Tootsie Roll, and not Hershey, will fare better than the S&P 500 over the next year. I'm not saying Hershey is going to melt away, but on a relative basis, it's Tootsie that should stick to the roof of one's mouth -- and portfolio.
Next: Paul's Goody Bag