Tootsie Rolls In The Dust

It has been a wild ride the past few weeks as the markets once again wash out some of the built up excesses (which, however painful, is also very healthy), this time due to the "subprime" event (can we please wipe that word clear from our vocabulary....enough already) and the specter of a credit crunch. Given the path that under-the-radar Tootsie Roll (TR) has taken the past few days, you would have thought it was a BBB rated ABS tranche.

The stock was down 14% Friday on four times normal volume, on the heels of a disappointing quarter. After hitting a 6 month high of $32.43 Thursday, the stock closed regular trading Friday at $26.48, for a $6 or 19% swing over just two trading days.

Margins Fall

Second quarter sales were up 7% to $101.9 million, from the same quarter last year. However, cost of goods sold rose substantially, lowering gross margins to 34.2% from 40.1%. The company cited rising ingredient and packaging costs for the margin pressure. Still, the company managed a healthy net margin of 10.2%, although that's down from 11.2%.

On the bright side, the balance sheet remains very healthy with cash and short term investments of $60 million, LT investments of $59 million, and split dollar life insurance of $75 million. LT Debt is negligible at $7.5 million; there is also $13.2 million in post retirement healthcare liabilities.

Disappointing
We've certainly not been happy with Tootsie Roll's performance since we've owned the stock. After considering cash and stock dividends, we are flat after 3 years. We are not rushing for the exits, because we still believe there is value in this very strong brand. However, we believe this company needs to be sold in order for the value to be unlocked.

Previous Cheap Stocks Tootsie Roll Research.

TR 1-yr chart:

Disclosure: The author has a position in Tootsie Roll Industries. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.