Tootsie Roll's 2025 Rally Masks Persistent Cost and Valuation Headwinds

What happened

Tootsie Roll's stock has risen 20% in 2025, with earnings per share growing for three consecutive quarters, as reported in a recent article. However, DeepValue's analysis indicates the shares already trade at a premium ~32.7x TTM EPS, limiting near-term upside potential. The company is constrained by extended cocoa and chocolate supply contracts secured at elevated prices through 2026, capping margin recovery. Although its non-chocolate portfolio provides relative insulation from cocoa volatility, risks like customer concentration and competitive pressures persist. Thus, despite strong cash flow and a net cash position, the investment case remains a Hold until cost normalization and execution improve.

Implication

The reported EPS growth and share price surge are positive but do not address core issues from DeepValue's report, such as elevated cocoa costs locked in until 2026, which will suppress margins. TR's premium valuation of ~32.7x TTM EPS offers little margin of safety, especially with ongoing risks like customer concentration (e.g., McLane at 20.7% of sales) and seasonal sell-through variability. While the strong balance sheet and non-chocolate skew provide downside protection, upside depends on cocoa price normalization and successful pricing retention, which are uncertain. Investors should monitor contract roll-offs and Halloween performance for signs of improvement before considering a more bullish stance. Overall, the risk-reward profile remains neutral, favoring patience over chasing recent momentum.

Thesis delta

The positive news of share price appreciation and EPS growth does not shift the Hold thesis from DeepValue, as key concerns around valuation, cocoa cost pressures, and execution risks remain unchanged. Investors should not interpret the rally as a signal to buy, but rather await clearer evidence of margin recovery and sustainable fundamentals.