Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The J.M. Smucker Company (SJM), Tootsie Roll Industries, Inc. (TR): Should You Bet the Farm on Family Firms?

Corporate governance risk score is also high due to Compensation risk with other officers’ pay in the million dollar plus range.Tootsie Roll Industries, Inc. (NYSE:TR) is a $1.90 billion market cap but Q1 net earnings came in at $9,069,000. 2012 net earnings came in at $52 million.

Excepting these concerns the company has a debt ratio of only 1.15 and repurchased $9 million worth of stock in 2012 as well as paying out its 48th consecutive dividend.

The Board has been characterized as secretive and a crony culture by The Wall Street Journal with average tenure of three decades. Both Gordons are on the Board. Despite these risks it must be noted the stock has gained 34.26% this last year. The company offers a small yield of 1.00% and has a trailing P/E of 36.61. Analysts expect 9.00% five year EPS growth.

Another worry of potential investors in family firms is innovation. Not to worry with The J.M. Smucker Company (NYSE:SJM); the company has made many acquisitions in the last decade with the most valuable being Folger’s coffee which they bought from The Procter & Gamble Company (NYSE:PG). This one buy dramatically changed their fortunes as a jam and jelly company to a food power equal to competitors Mondelez International Inc (NASDAQ:MDLZ), also a competitor to Tootsie Roll, and ConAgra Foods, Inc. (NYSE:CAG).

Meanwhile, Tootsie Roll Industries, Inc. (NYSE:TR), has plodded along with mostly old-fashioned brands:Tootsie Roll, Sugar Babies, Junior Mints, Nik-L-Nip, Dubble Bubble, Andes Mints, and Charleston Chew. Granted they are well-known brands but the company has changed them very little.

The short interest in the name is increasing and in mid-June stood at 16.50%.



SJM Return on Equity data by YCharts

The corporation model

Since Mondelez competes with both a comparison is advisable. Mondelez spun off Kraft Foods Group Inc (NASDAQ:KRFT) last fall keeping CEO Irene Rosenfeld and most of the snack, candy, powdered beverages, and coffee.  It is five times the size of The J.M. Smucker Company (NYSE:SJM) at a market cap of $50.91 billion and has a trailing P/E of 18.38 with a PEG of 1.63 and a 1.80% yield. It trades at 1.63 times book.

Not family run anymore, the company did start as a family business (no relation to me) in 1903 when J.L. Kraft started a wholesale cheese business.

Mondelez is the example of a company with innovation and the more generally accepted business model of the modern corporation with a corporate governance risk score of 5, better than these family run companies. However, Mondelez runs with a much higher debt ratio than Tootsie Roll or Smucker as most major food giants do.

The Foolish takeaway

While J.M. Smucker is an example of a family company that is facing the future with innovation and growth, Tootsie Roll Industries, Inc. (NYSE:TR) should concern investors with the worst of family firm disadvantages, doing things the old way and keeping a crony Board without the benefit of frugality.

As The J.M. Smucker Company (NYSE:SJMhas run big over the last few years, seemingly at new all time highs every day it would be wise to wait for a pullback. But its strength in incorporating the best practices of a Mondelez like international expansion and accretive acquisitions should keep it on your shopping list.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Should You Bet the Farm on Family Firms? originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.