Dueling Fools
The Chocolate War
Paul's Goody Bag
By
I have to admit that this Duel with Rick originally had me slated to sing the praises of Hershey while bashing Tootsie. Yet after I took a closer look at the company I was supposed to argue against, I felt like a real fool (small f). Tootsie is a sweet little company, and I would have had very little traction in my bearish take.
So who's better? Hershey or Tootsie? At this point, I would have to say Tootsie wins by a hair. Between a higher return on invested capital and an overall more efficient operation, I was impressed by what I saw from Tootsie. That isn't to say that I think Hershey is dog meat. Hershey is, in my opinion, an outstanding company with great products and brand names in its portfolio. (Look at this week's Halloween special to see some of my other thoughts on Hershey.) However, it's obvious from looking at the numbers that Tootsie kicks Hershey's tail.
Both companies have a lot to like. Being in the food industry, both companies can be seen as "defensive" companies. No matter where the economy goes or what newfangled technologies arise, people still need to eat. And being in the confectionary industry with its concurrent branding power and higher margins, Hershey and Tootsie's sales and profits have a high degree of safety built in. Because of the relative lack of risk, I'm willing to discount future cash flows at a lower required rate of return because I'm confident in the future cash flows.
These are companies operating in a mature industry. Neither Hershey nor Tootsie needs to invest great amounts of capital to build or maintain their businesses. Rather, these are companies that can sit back and watch the cash come rolling in from their heavily entrenched operations. Both have copious amounts of free cash flow that can be used to pay down debt (in Hershey's case), increase dividends, and repurchase shares. Over time this free cash flow and the ways in which it is deployed should have a lifting effect on the stock.
No one will mistake Hershey and Tootsie as "Internet stocks" or biotechnology princes. Rather than working in a rapidly emerging industry with an unpredictable future, our candy titans are operating in an established industry and have long, long records of proven profitability. I have a feeling that, for the patient long-term investor, both Hershey and Tootsie will provide excellent returns.
In short, my guess is that both companies will beat the S&P over the next year. The valuation is compelling, the earnings relatively safe, and the free cash flow can be used to propel the stock ever northward.
But don't take our words for it. Research both companies and tell us what you think Hershey and Tootsie will do by clicking the next page....
Also Check Out the Duel Flashback: Cola Wars
Next: Vote Results