TAKING STOCK

Dear Mr. Berko:

I have always been interested in Tootsie Roll, which was my favorite candy when I was a kid. I recently saw the stock trading at $29 a share. That is down from $48 last year. Do you think it would be good to buy 30 shares for my individual retirement account?

K.F.  Aurora, Ill.

Dear K.F.:

Melvin Gordon, Tootsie’s 83-year-old chairman and chief executive officer, and Ellen Gordon, Tootsie’s 71-year-old president and chief operating officer, control 74 percent of the voting power of this 107-year-old candy company.

The Gordons, who have been running Tootsie Roll Industries Inc. (TR-$29) since 1962, are not the founders. Leo Hirshfield, an Austrian immigrant brought his chewy chocolaty candy recipe to the United States and began selling it in a New York City storefront for a penny apiece. Amazingly, today’s Tootsie Roll tastes the same as it did 107 years ago and still sells for a penny, though today’s size is smaller.  Hirshfield named this delectable candy Tootsie after his daughter. During 1897, his first full year of selling candies, Hirshfield had gross revenues of $1,422.18 and a net income of $671.42.

Today, TR produces 60 million Tootsie Rolls daily and, as the world’s largest lollipop maker, the company rolls out 20 million Tootsie Pops every day. Last year, Hirshfield’s little company had $393 million in revenues and earned $66 million in the process.

TR, which was listed on the New York Stock Exchange in 1922, has enjoyed enormous success. In 1988, TR acquired the Charms Co., manufacturer of Blow Pops, Charms Squares, Charms Pops, Zip-A-Dee-Doo-Das, Blue Razz, Black Cherry, Extreme and Way Sour. In 1993, TR bought Junior Mints and now makes 15 million Junior Mints a day in its Cambridge, Mass., plant. In 1992, TR bought Sugar Daddy, Sugar Babies and Charleston Chew from the pharmaceutical giant Warner-Lambert Co.

In 1972, TR acquired the Mason Division of Candy Corporation of America, adding Mason Dots and Crows to its famous line of candies. In 1996, TR created Carmel Apple Pops and S’Moresels. Then, in 2000, TR bought O’TEC Industries and started to manufacture Fluffy Stuff Cotton Candy. TR also purchased Andes Candies from Brock & Brach, including Creme de Menthe, the No. 1 after-dinner mint on the market.

TR shares have enjoyed enormous success since the early 1970s, when revenues were just $60 million. The company has consistently paid an annual 3 percent stock dividend and has split 2 for 1 on three occasions in the past 30 years.

In early 2001, TR shares traded at $49 each and the future looked as sweet as sweet could be. However, in the past couple of years, TR has been having a tough time competing in a difficult economic environment. The bankruptcy of Ames, the closing of many Kmart stores, fierce competition from Hershey, Kraft, Lance, Ralcorp and Mars, higher costs of sugar, corn syrup, chocolate and other ingredients, have hurt TR’s revenues and bottom line. Meanwhile, TR has maintained a very strong balance sheet with common stock representing 99 percent of capital and about $2.30 per share in cold cash.

TR is a small company, perhaps too small to compete effectively against the big boys with revenues in the billions. I suspect that Mel Gordon may not have the stomach to compete effectively. While TR’s products are well-known among consumers, as with most food-related products, promotions and innovations with line extensions are critical to continued interest in current brand names. TR needs new blood with a sweet tooth to compete with Wrigley, Hershey and Unilever for shelf space and the consumer’s tummy.

Revenues, earnings and net profit margins have declined in the past two years, but they should begin to rebound this year. I think the stock is priced fairly at $29. I also believe the shares are not a good choice for long-term appreciation.

There is one caveat: the Gordons may decide that their ages preclude them from an active interest in TR and that a larger competitor would serve the shareholders better than they would. If that becomes a reality, there could be 10 more points in the stock.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or visit his Web site at www.berkoradio.com.  (c) Copley News Service  Visit Copley News Service at www.copleynews.com.