Tootsie Roll: Cocoa Prices Continue Pressuring Earnings

seekingalpha11-23 12:23

Tootsie Roll's revenue declines have sharpened, with consumers resisting higher pricing. The pricing changes have protected margins at the cost of sales.Cocoa prices remain elevated, weakening Tootsie...

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The pricing changes have protected margins at the cost of sales.Cocoa prices remain elevated, weakening Tootsie...</p>\n\n<a href=\"https://seekingalpha.com/article/4739763-tootsie-roll-cocoa-prices-continue-pressuring-earnings-tr-stock\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Tootsie Roll: Cocoa Prices Continue Pressuring Earnings</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nTootsie Roll: Cocoa Prices Continue Pressuring Earnings\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-23 12:23 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739763-tootsie-roll-cocoa-prices-continue-pressuring-earnings-tr-stock><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Tootsie Roll's revenue declines have sharpened, with consumers resisting higher pricing. The pricing changes have protected margins at the cost of sales.Cocoa prices remain elevated, weakening Tootsie...</p>\n\n<a href=\"https://seekingalpha.com/article/4739763-tootsie-roll-cocoa-prices-continue-pressuring-earnings-tr-stock\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"TR","symbol_name":"Tootsie Roll Industries Inc","start_time":0,"source_url":"https://seekingalpha.com/article/4739763-tootsie-roll-cocoa-prices-continue-pressuring-earnings-tr-stock","article_id":"2485229246","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/516417406/image_516417406.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485229246","pubTimestamp":1732335780,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Tootsie Roll's revenue declines have sharpened, with consumers resisting higher pricing. The pricing changes have protected margins at the cost of sales.Cocoa prices remain elevated, weakening Tootsie","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"TR":"Tootsie Roll Industries Inc"},"translate_title":"Tootsie Roll：可可价格继续给盈利带来压力","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TR":0.9},"content_text":"Tootsie Roll's revenue declines have sharpened, with consumers resisting higher pricing. The pricing changes have protected margins at the cost of sales.Cocoa prices remain elevated, weakening Tootsie Roll's short- to midterm outlook further.The TR stock remains overvalued, and I estimate 23% downside to a fair value of $25.09.   memoriesarecaptured  Tootsie Roll Industries, Inc. (NYSE:TR), the candy manufacturer with well-established brands such as Tootsie, Charleston Chew, and Junior Mints among others, has continued reporting weak revenues as consumers are resisting price increases amid high-cost inflation for confectionery products. The company has instead chosen to prioritize maintaining margins. In my previous article on the stock, “Tootsie Roll’s Q1 Revenues Turned Sour”, I downgraded my rating into Sell with Tootsie Roll turning towards revenue declines amid cost inflation, not supported by the stock’s high valuation. After the article was published, Tootsie Roll’s stock has now returned 8% compared to S&P 500’s return of 12%. My Rating History on TR (Seeking Alpha) Tootsie Roll’s Revenue Decline Sharpened in Q3 After the weak Q1 results with a -5.5% revenue decline, Tootsie Roll’s revenue declines have only sharpened. The company reported its Q3 results on the 8th of November, showing an even steeper decline in the seasonally important quarter - revenues reached $225.9 million, down -9.6% year-on-year. Tootsie Roll again related the revenue decline to customer resistance to higher pricing, as well as a different timing of sales between Q3 and Q4 that weakened the comparative Q3 result in 2024. I believe that the result was incredibly weak – confectionery products are incredibly defensive in nature, making such wide revenue declines worrying. For comparison, The Hershey Company (HSY) reported just a -1.4% revenue decline in Q3 and is expected to have flat 2024 sales, highlighting Tootsie Roll's especially weak sales. While higher cocoa prices clearly highlight the need for increased pricing, Tootsie Roll’s weaker result underlines consumers turning towards alternative brands. Positively speaking, the increased pricing has protected Tootsie Roll’s margins – while The Hershey Company’s Q3 gross margin declined 3.6 percentage points year-on-year, Tootsie Roll managed to maintain a stagnant gross margin. On the other hand, SG&A inflation and the lower sales have still pushed down Tootsie Roll’s earnings significantly – higher cocoa prices continue to ravage Tootsie Roll’s earnings with the earnings decline only sharpening in Q3. Cocoa Prices Remain Elevated Tootsie Roll believes the difficulties to persist in Q4 and throughout 2025 due to increased input costs – while cocoa futures have cooled off from the April peak, cocoa prices remain extremely elevated with bottled demand and lower harvests due to poor weather conditions. Although farmers are already planting more cocoa trees in light of the price surge, the trees take around 5-6 years to produce fruits, making for a likely prolonged period of high cocoa prices. Cocoa Futures (Seeking Alpha) In light of the persisting cocoa price crisis, competitors could start to also increasingly push the higher input costs into pricing to protect margins, which could benefit Tootsie Roll as the company’s products would become cheaper in relation to competitive products on shelves. Yet, given Tootsie Roll’s already weak long-term growth profile, such a benefit wouldn’t likely raise the company’s growth back to a good level – the higher cocoa prices remain a clear negative for Tootsie Roll, causing short- to mid-term earnings uncertainty even after the especially weak Q3 revenues. The TR Stock Remains Overvalued I updated my discounted cash flow [DCF] model for the TR stock. In the DCF model, I estimate very slow growth from Tootsie Roll in light of the recent performance. For 2024, I estimate revenues to decline -6.8%, after which I estimate revenues to slowly rebound to perpetual 1.5% growth. Food at home inflation has slowed down to just 1.1% in October, making for a weak nominal revenue boost in upcoming quarters and years, and Tootsie Roll seems to already have pushed the elevated cocoa prices into its pricing. With the company protecting its margins well, I now estimate Tootsie Roll’s EBIT margin to stay at 15.0% going forward. The low growth requires minimal capital expenditures and working capital increases, once again making for a relatively good cash flow conversion. Previously, I estimated just a -2.5% revenue decline in 2024 and 0.5% growth in 2025, but for the EBIT margin to reach just 14.0%. DCF Model (Author's Calculation) The estimates put Tootsie Roll’s fair value estimate at $25.09, 23% below the stock price at the time of writing. The weakness in revenues still isn’t supported by the stock valuation despite Tootsie Roll’s good ability to sustain margins. The fair value estimate is up from $23.92 previously. The Tootsie Roll stock trades at a trailing 24.9 P/E, comparing to The Hershey Company’s lower 19.6 P/E despite Hershey’s much better long-term growth – on top of a weak absolute valuation, Tootsie Roll also seems expensive in relation to the most notable competitor. CAPM The DCF model uses a weighted average cost of capital of 6.20%, down from 6.38% previously. The used WACC is derived from a capital asset pricing model:   CAPM (Author's Calculation) I continue estimating no debt from Tootsie Roll. To estimate the cost of equity, I use the 10-year bond yield of 4.42% as the risk-free rate. The equity risk premium of 4.11% is Professor Aswath Damodaran’s estimate for the US, updated in July. I have kept the beta at 0.36. With a liquidity premium of 0.3%, the cost of equity and WACC both stand at 6.20%. Takeaway  Tootsie Roll’s revenue declines have only sharpened as customers are resisting the company’s increased pricing: Tootsie Roll has managed to maintain margins with pricing increases, but has lost customer interest as a compromise, with Hershey performing significantly better in sales. As cocoa prices remain elevated, the company’s outlook stands uncertain. The valuation once again remains too expensive, especially when considering the short- to midterm earnings uncertainty, and as such, I remain with a Sell rating for Tootsie Roll.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485229246"}