Tootsie Roll's Stuck in a Rut

It's been six months since my last piece on Tootsie Roll (TR - commentary - Trade Now), and little has changed. So why am I revisiting the story? Because little has changed -- and that's not a good thing.

The products are still the same (though that's not necessarily negative), the margins are still relatively strong, though not nearly as strong as they once were, and Melvyn and Ellen Gordon are still in control. The stock price is almost exactly where it was nearly 12 years ago, while the S&P 400 Midcap Index, of which Tootsie Roll is a member, has more than doubled. On a total return basis, Tootsie Roll shares are actually up during that timeframe due to dividends, but barely.

This is the very disappointing story of a company whose brands are engrained into American culture yet whose shareholders have reaped little in the way of reward over the past several years. Originally launched in 1896, Tootsie Roll's current lineup includes products that many of us grew up with (and some us, yours truly included, still enjoy today), including Charleston Chew, Dots, Double Bubble, Junior Mints, Charms Blowpops, Razzles, Sugar Babies, Sugar Daddies, Andes Mints, Tootsie Pops, and of course, the flagship Tootsie Rolls -- strong brands all that would probably fetch a nice price in an acquisition, but there's one major problem. Management owners that call the shots hold the majority of Class B shares with superior voting rights and have shown little inclination of slowing down, despite their ages.

Melvin Gordon, at age 89, is CEO and chairman of the board, a position he's held since 1952. His wife, Ellen, age 77, is COO and president, a position she has held since 1978. Together they owned or controlled 43.7% of Tootsie Roll's common shares, and 81.6% of the Class B shares with superior voting rights, as of last March. With that in mind, nothing will ever get done in terms of the sale of the company unless the Gordons approve.

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At the time of publication, Heller had no positions in the stocks mentioned.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.