2023-05-31 15:51:56 ET
Summary
- Today, we take our first look at The Toro Company, a provider of outdoor products both to Residential and Professional segments.
- The company delivered more than solid results in 2022, but the equity's valuation looks stretched, and growth is slowing significantly.
- What's ahead for The Toro Company in 2023? An investment analysis follows in the paragraphs below.
"It's a recession when your neighbor loses his job; it's a depression when you lose your own." - Harry S. Truman.
Today, we put The Toro Company ( TTC ) i n the spotlight for the first time. The company delivered stellar revenue and earnings growth in FY2022. However, growth is projected to slow significantly in both FY2023 and FY2024, and there has been a spate of insider selling in the stock so far this year. Is this growth slowdown priced into the current price of the shares? An analysis follows below.
Company Overview:
The Toro Company supplies outdoor products to both the Professional and Residential customer. These products include items such as turf and landscape equipment products, including sports fields and grounds mowing and maintenance equipment to the Professional segment and offerings such as walk power mowers, zero-turn riding mowers, snow throwers, replacement parts, and home solution products that include grass and hedge trimmers to the Residential segment. The stock currently trades just south of $100.00 a share and sports an approximate market capitalization of $10.5 billion.
First Quarter Results:
On March 9th, the company posted its first quarter numbers . The company delivered non-GAAP profits of 98 cents a share, four cents a share above expectations. Revenues rose just over 23% on a year-over-year basis to $1.15 billion, slightly below the consensus forecast.
March Company Presentation
It was somewhat of a bifurcated quarter. Sales at the company's Professional division jumped nearly 31% from the same period a year ago to just over $880 million. Both sales growth and margins were helped by the $400 million acquisition of Intimidator Group in January of this year. This was a strategic " bolt-on" acquisition, as Intimidator Group owns Spartan Mowers. This is a professional line of zero-turn mowers. They also make a variety of side-by-side utility vehicles that perform well in tough terrains.
March Company Presentation
In contrast, Residential sales rose less than four percent from 1Q2022 to just under $265 million. Overall, gross margins improved to 34.5% from 32.2% in the same year ago period. Management provided the following initial guidance for FY2023.
March Company Presentation
Analyst Commentary & Balance Sheet:
The analyst community is mixed on Toro's prospects at the moment. On March 10th, Robert W. Baird reissued its Hold rating and took down its price target on TTC from $120 to $116 a share. Northland Securities initiated the shares as a Market Perform with a $110 a share price target on April 17th. Raymond James maintained its Buy rating late in March, and C.I. King initiated the shares as a new Buy with a $133 a share price target two weeks ago.
A director bought $100,000 worth of shares at the end of March. That buying has been swamped by insider selling here in 2023. Numerous insiders have sold nearly $14 million worth of equity collectively year-to-date in myriad and frequent transactions. Less than two percent of the outstanding float is currently held short.
At the end of the first quarter, the company had a gross debt-to-EBITDA leverage ratio of 1.5. Management's target range is 1.0 to 2.0 on this metric. Interest expense for the quarter was $14.1 million. This was almost double that of $7.1 million from the same period last year. This increase was both due to incremental borrowings to fund the Intimidator Group acquisition and higher average interest rates.
March Company Presentation
Concerningly to me, inventory was up 36% to $1.1 billion. Management attributed this " to higher finished goods, work in process and service parts. In addition, this includes the impact of inflation ." The company's CFO is scheduled to retire in July.
Verdict:
The current analyst consensus has The Toro Company making $4.85 a share in FY2023 on sales growth of just over 10% to nearly $5 billion. They project revenue will be cut in half in FY2024, but profits will improve to $5.40 a share. In FY2022, The Toro Group saw 23% sales growth and delivered earnings of $4.20 a share in profits, a 49% improvement over FY2021.
It is hard to see much compelling value here for The Toro Company at current trading levels. An investor is paying 20 times forward earnings for an entity that is projected to see revenue growth slow from 23% in FY2022, to 7% to 10% in FY2023 (per management guidance) to mid-single digits in FY2024 (analyst firm projections). Earnings growth is also projected to slow significantly. The stock pays a paltry 1.35% dividend yield.
The Toro Company is trading at just over the overall market multiple (Roughly 18 times earnings for the S&P 500 Index), is in a cyclical industry, and the stock is seeing some significant insider sales. Analyst firm support is also tepid at best. Therefore, the investment recommendation is to avoid The Toro Company stock at current trading levels.
"During recession greed dies, frugality survives. " - Amit Kalantri, Wealth of Words
For further details see:
The Toro Company: Growth Challenges Ahead