December means a lot of things. The start of the holiday season means seeing family, shopping for gifts, and planning social events. In a pandemic-driven world, a lot of us have been looking forward to this holiday season to restart many of those same activities that we were forced to minimize or possibly even avoid last year. The health crisis isn’t over, and that’s why a lot of health experts are still advising caution in holiday-driven social gatherings. Even so, the Christmas holiday is an opportunity to reflect on and be grateful for the good things and people in our lives, and on what the difficult things have taught us.
Depending on where in the world you live, December also means colder weather. Where I live, the holiday season isn’t quite the same without snow on the ground and early morning frost on car windows. For the handyman in your family, winter weather also means it’s time to break out the winter toys, like snow blowers. Companies that make winter maintenance equipment do a lot more than just snow blowers, of course, and usually provide a range of products and equipment for all seasons.
The Toro Company (TTC) is a case in point. This is a company that makes a lot of the brands you probably associate with home and yard maintenance, including Toro (mowers, blowers, trimmers), Lawn-Boy and Lawn Genie (sprinkler heads and valves, irrigation systems for residential and commercial landscapes). They have also made significant investments in the last two years in commercial, underground construction equipment with an eye on the ongoing, long-term buildout of 5G wireless infrastructure across the United States, to name just one of their commercial end markets. This is a mid-cap stock that I think has clear intentions not only to thrive in their recognized markets, but also to grow and expand into new ones.
The last two years, like just about every company, have carried with them a fair share of challenges for TTC to deal with, but the company has survived better than many other competitors, with a healthy balance sheet featuring healthy liquidity and conservative use of debt. Unlike a lot of other companies, management wasn’t forced to reduce or eliminate its dividend payout to preserve cash; in fact, they raised the dividend at the end of 2020, and again this year after the company released its latest earnings report at the start of this month. The stock is also in a downward trend that began in late April at a high of about $118 and has visited its 52-week low multiple time at around $92.50. The latest bounce off of that level was at the beginning of this week, with the stock rallying about $4 higher from that point as move into the final days before Christmas. The stock’s bearish trend is something that would make most growth-oriented investors turn away; but for a value investor, it increases the level of intrigue. I think this is a stock that a smart investor should be paying close attention to right now. Let’s dive in.
Fundamental and Value Profile
The Toro Company (Toro) is engaged in the designing, manufacturing, and marketing of professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. The Company operates through three segments: Professional, Residential and Distribution. Under the Professional segment, Toro designs professional turf, landscape and lighting, rental and specialty construction, snow and ice management, and agricultural products. The Residential segment provides products, such as riding products, home solutions products and snow thrower products. It manufactures and markets various walk power mower models. The Distribution segment consists of Company-owned domestic distributorship. Its brands include Toro, Exmark, BOSS, Irritrol, Hayter, Pope, Unique Lighting Systems and Lawn-Boy. TTC’s current market cap is $10.2 billion.
Earnings and Sales Growth: As of January, earnings decreased -12.5% in the prior twelve months, while revenues improved almost 14.25%. In the most recent quarter, earnings declined more than -39% while revenues slipped about -1.66%. TTC’s operating profile is showing some signs of weakness; Net Income was 10.35% of revenues in the trailing twelve-month period, but slipped to 6.26% in the last quarter. This could be a cyclical decline, or it could be driven by a combination of cyclical factors and supply constraints that are raising costs for practically every sector in the industry right now.
Free Cash Flow: TTC’s free cash flow is modest, at a little more than $425 million and translates to a Free Cash Flow Yield of 4.11%. It is worth noting that two quarters ago, this number was a little over $683 million. I think the decline from that point provides a confirmation of some of the challenges the company has confronted and that are also reflected in the Net income pattern I just described.
Debt to Equity: TTC has a debt/equity ratio of .6, which generally conservative. Their balance sheet shows about $406 million in cash and liquid assets versus about $691 million in long-term debt. It is worth mentioning that cash has increased significant, from a little over $100 million in mid-2020 to it’s current level. TTC’s operating profile indicates that even with the current drop in Net Income, operating profits are sufficient to service the company’s conservative debt levels.
Dividend: TTC pays an annual dividend of $1.24 per share, which translates to a yield of about 1.24% at the stock’s current price. It should also be emphasized that TTC’s dividend payout has increased by about 24% from the beginning of 2020; this is a point of strength that the past two year’s conditions only emphasize even more.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at about $121.50 per share. That means the stock is trading at a discount of about 25% from that level right now, which is very attractive.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line on the chart above outlines the stock’s downward trend from an April peak at around $118 to its November low at around $92.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Current support is at the last pivot low, around $92.50, with immediate resistance at around $98.50, based on pivot activity in late September and early October. A break above $98.50 should find next resistance at around $100.50, with $102.50 reachable where the 38.2% retracement line sits if buying activity remains strong. A drop below $92.50 would mark a new 52-week low, with near-term downside to about $88 based on previous pivot activity seen in September of 2020.
Near-term Keys: TTC is an interesting company to be paying attention to right now. The stock’s downward trend doesn’t look nice, but the fact is that this is a company that has weathered the troubles of a pandemic world better than expected and is sitting at a very nice value price because of the way market momentum has shifted against it. That is an opportunity for value-oriented investors that I think is worth considering seriously. If you prefer to focus on short-term trading strategies, you could use a push above $98.50 as an opportunity to buy the stock or work with call options, with $100.50 providing a reasonable initial profit target and $102.50 adding additional upside if bullish momentum increases. If the stock drops below $92.50, you could consider shorting the stock or buying put options, with $88 acting as a useful profit target on a bearish trade.