Marcial: Pros Are Nibbling at Tootsie Roll

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3% and earnings per share declined 13% because of disappointing Halloween candy sales in the aftermath of September 11 and the consequent U.S. economic slump.

Tasty synergies?

Sales growth has been sluggish since then, and earnings have not exceeded peak earnings of $1.24 a share in 2000. Schlang says margins and the returns on assets, equity, and invested capital have been down to multiyear lows. He figures sales in 2008 will be flat at 91¢ a share and lower in 2009 and 2010. He blames the poor numbers on anemic new-product introductions and the higher cost of ingredients such as sugar, corn syrup, vegetable oil, cocoa, milk, dextrose, and gum base.

All these woes might attract its bigger rivals, which could see the prospect of rewarding synergies and potential growth in combining with Tootsie Roll. Such larger competitors include Hershey (HER), Mars and Wrigley (WWY), which announced their combination on Apr. 29, Switzerland's Nestle, Cadbury-Adams, and Russell Stover. Any one of these rivals could end up buying Tootsie Roll.

Like Gabelli and Schlang, the big institutional stakeholders in Tootsie Roll expect to eventually move on and sell the company. Gabelli, for one, has been buying shares at an average price of $28 to $32. With the stock currently at $27, it is obvious that Gabelli has high expectations that in any deal, Tootsie Roll would be worth much more. With a current market capitalization of $1.4 billion, Tootsie Roll would seem an inexpensive acquisition for its larger peers, even allowing for a rich takeover premium. And that would be a sweet treat indeed.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.