Tootsie Roll Highlights Crazy Market
The current S&P 500 bear market was officially announced on June 13, 2022 and it doesn’t seem as if the bear market is over yet. A sustained recovery will likely commence only once interest rates peak, and further rises are no longer expected. In spite of the general market malaise, some stocks are bucking the trend when it comes to valuation metrics.
A comparison between Apple (AAPL) and Tootsie Roll (TR) highlights the madness. For example, why is Tootsie Roll trading at nearly 2x the earnings multiple of Apple?
Tootsie Roll vs. Apple – Comparing P/E Ratios
Apple and Tootsie Roll are iconic names, but for different reasons. Tootsie Roll has a vast history, with the first candy created well over a century ago. Today, the company makes dozens of types of candy, ranging from Blow Pops to Charms Assorted Squares. There’s no denying the brand has a strong market presence, but can it compare to Apple — the world’s most valuable brand?
When comparing Tootsie Roll’s P/E ratio to Apple’s, you see how crazy the market is.
- Tootsie Roll P/E = 44
- Apple P/E = 24
Tootsie Roll currently trades at almost double the earnings multiple of Apple. Based on these numbers alone, investors would expect higher earnings growth in the future for Tootsie Roll, as Apple has a significantly lower ratio.
Comparing These Companies Side by Side
Apple is a tech giant with a wide moat. The company has immense pricing power, some of the most loyal customers in the industry, a sticky ecosystem, growing revenues, a solid share buyback program, and pays a dividend.
There’s a lot to like, which is why Warren Buffett continues to increase his holding. To some, it’s surprising that Apple accounts for more than 41% of Berkshire Hathaway’s portfolio.
And then there’s Tootsie Roll.
It’s a stable company with a long history. It has paid a modest dividend to shareholders for over 50 years and has remained a safe haven for investors. Despite that, it has struggled to grow in recent years, and as long as the Gordon Family remains majority owners, that trend will likely continue. Its high valuation is hard to justify — especially when comparing it to a company like Apple.
What Does It All Mean?
Some analysts would say that Tootsie Roll is a stagnant company that lacks innovation — unlike Apple, which has molded a strong culture based on innovation.
Comparing the P/E ratio of these companies side by side suggests that Tootsie Roll is overvalued. Apple has long been seen as a stock with a rich valuation. However, its wide moat and market position in the tech industry commands a high P/E — even though its growth profile isn’t as high as other companies.
In Q3 2022, global smartphone shipments were down 9% year-over-year. Yet Apple managed to sell 49 million iPhones during the quarter, an increase of 6% compared to the previous year. This year-over-year growth contributed $42.6 billion in revenue, accounting for 47% of the company’s total net sales. As a result, Apple’s share of the global smartphone market increased to 16.3%.
Apple’s P/E today suggests a discount compared to last year’s earnings multiple.
Tootsie Roll has reported a jump in revenue and profitability this year. The company’s stock price has soared nearly 25% year-to-date, yet many agree — proceed with caution with this company. Tootsie Roll is a good company but will likely yield limited upside based on the price of shares today. Revenue growth is steady but slow based on the company’s history.
P/E Isn’t Everything
The P/E ratio is one of the most popular market ratios — but it only tells part of the story. Sometimes, this ratio can create false signals.
Its most significant limitation is that it doesn’t tell you anything about a company’s EPS (earnings per share) growth prospects. Consider buying shares when this value is high, even if the P/E ratio is high.
Bottom line
No single ratio or metric can tell you everything you need to know about a company or its value. You’ll need to consider several ratios to gain greater insight into a stock’s valuation. Tootsie Roll will likely continue to do well long term. However, based on its current P/E, you may want to add this company to your watchlist instead of buying in today.
In contrast, based on current share prices, Apple is a stock you might want to invest in — primarily if you’re investing long-term.
