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%.
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:SJM) has 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.
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