The Toro Company is a leading provider of products and solutions for the outdoor environment. As grass continues to grow, snow continues to fall, and infrastructure continues to age, the runway for The Toro Company should be long. The Toro Company also benefits from regular product replacements, which generate recurring revenue. Therefore, The Toro Company could be an intriguing investment. In this analysis, I will investigate whether I should invest in The Toro Company.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of The Toro Company. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in The Toro Company's competitors either. Thus, I have no personal stake in The Toro Company. If you want to purchase shares or fractional shares of The Toro Company, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
The Toro Company was founded in 1914 in Minnesota, United States. The Toro Company designs, manufactures, markets, and sells professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural irrigation systems, rental, specialty, and underground construction equipment, as well as residential yard and snow thrower products. Their products are marketed and sold worldwide through distributors, dealers, mass retailers, hardware retailers, equipment rental centers, and home centers, as well as directly to consumers (mainly states and municipalities). The Toro Company owns 17 different brands, including Toro, Ditch Witch, eXmark, Spartan, BOSS, Ventrac, American Augers, Trencor, Pope, Subsite, Hammerhead, Radius, Perrot, Hayter, Unique Lightning Systems, Irritrol, and Lawn Boy. The Toro Company operates in two business segments: Professional and Residential. The Professional segment is the largest, contributing approximately 81% of the net sales, while the Residential segment contributes approximately 19% of the net sales. The Professional segment also boasts the highest margins, with an operating margin of 18% compared to 11% in the Residential segment. The Toro Company makes most of its sales in the United States, with approximately 79% of net sales coming from the United States and approximately 21% coming from international sales. The Toro Company generates most of its revenue through product sales, but also earns revenue from selling parts and services, such as repair services and extended warranty programs. The Toro Company has established a robust brand reputation over the years, fostering strong relationships with dealers and distributors. The strong brand, combined with the close relationship with its customers, is what gives The Toro Company its moat.
Management
Their CEO is Richard Olson. He joined The Toro Company in 1986 as a manufacturing process engineer and held various leadership positions until he became the CEO in November 2016. Richard Olsen earned a Bachelor of Science in Industrial Technology from Iowa State University and an MBA from the University of Minnesota's Carlson School of Management. His leadership has been characterized by a focus on strategic growth, innovation, and sustainability. Under his guidance, The Toro Company has continued to expand its product lines, enter new markets, and invest in research and development to maintain its competitive edge. Richard Olson is recognized for his dedication to the company's fundamental principles, including integrity, customer focus, and a pursuit of excellence. Richard Olsen has done a commendable job, as The Toro Company has demonstrated resilience and growth under his leadership, while also gaining market share. However, there are two things that are somewhat concerning. One issue is that The Toro Company took a goodwill charge of over $150 million on its $400 million acquisition of The Intimidator Group, indicating that management significantly overpaid. The other concern is that Richard Olson has an employee rating of 68/100 at Comparably, which places him in the top 50% of similar-sized companies. However, it should be mentioned that the sample size at Comparably is small, and that Richard Olson scores much higher at Glassdoor, where he has an approval rating of 96%. Overall, I appreciate his experience and his emphasis on maintaining the company's competitive advantage. Thus, I believe he is the right person to lead The Toro Company moving forward, even though they overpaid for The Intimidator Group.
The Numbers
The first metric we will investigate is the return on invested capital, also known as ROIC. I would like a 10-year history with all figures demonstrating growth of over 10% for each year. The Toro Company has consistently achieved a Return on Invested Capital (ROIC) of over 10% for the past ten years, which is commendable. However, it is slightly concerning that The Toro Company reached its highest ROIC in 2017 and has not managed to return to that level since. The Toro Company achieved a return on invested capital (ROIC) in the 20s in 2021, but has since dropped below 20 again and delivered its lowest ROIC in the past decade in the last fiscal year. However, I believe that this is due to a combination of The Intimidator Group's acquisition and macroeconomic factors, which made 2022 and 2023 challenging for most companies. I hope to see an improvement in ROIC in the future, and I believe that is what will happen.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. These numbers are impressive because The Toro Company has managed to increase its equity every year for the past ten years, a feat achieved by only a few companies. The year-over-year growth has been somewhat volatile, with the highest yearly growth at 27,9% and the lowest at 3,4%, but it is not something I worry about. I'm really impressed by these numbers. The Toro Company is a textbook example of how you would like to see equity grow.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin is used because I believe that margins provide a better understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to see that The Toro Company has consistently generated positive free cash flow every year for the past decade. The free cash flow has significantly decreased since the acquisition of The Intimidator Group, and I would like to see improvement in this area moving forward. Management has stated that they expect the free cash flow to improve in fiscal 2024, which is encouraging. The levered free cash flow margin has also decreased significantly since The Intimidator Group, but it should improve moving forward as well. The low free cash flow yield indicates that the company is not trading at a low valuation. However, we will revisit this point later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on The Toro Company, I found that the company has 3,13 years of earnings in debt. It is just over the 3-year threshold, but this is due to the acquisition of The Intimidator Group. Usually, The Toro Company has less debt. Although there is an explanation for the high debt, it is not something that would deter me from investing in The Toro Company.
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Risks
Based on my findings so far, I believe that The Toro Company is an intriguing company. However, no investment is without risk, and The Toro Company also has its fair share of risks. One risk is macroeconomics. In its annual report, The Toro Company mentions that its net sales and earnings have been and could continue to be adversely affected by economic conditions. The residential segment is particularly affected by macroeconomic factors such as rising interest rates and economic uncertainty. As a result, net sales for the Residential segment were down 20% in fiscal year 2023. Therefore, if the United States were to experience a prolonged recession, it would impact The Toro Company's financial performance for an extended period.
Weather conditions. According to The Toro Company, weather conditions have previously affected and may continue to affect the demand for some of their products. For instance, drought or unusually wet conditions, or reduced snowfall will impact the sales of specific residential and professional mowing products. The Toro Company also notes that global warming may exacerbate the frequency or intensity of adverse weather conditions, a trend the company has observed in recent years.
The Professional segment includes a variety of products that depend on specific and diverse factors. There are various factors that can affect the Professional segment. Some of these include reduced revenue for golf courses, decreased investment in golf courses, reduced consumer and business spending on property maintenance, decreased levels of infrastructure, and customer and/or government budgetary constraints. The Toro Company cannot actively influence these factors, which is why I believe it is important to monitor them when investing in The Toro Company.
Reasons to invest
There are also numerous reasons to invest in The Toro Companies. One reason is the sustained strong demand in underground and specialty construction. Management has mentioned that they expect end-user demand for underground and specialty construction to remain robust due to increased private and public spending to address issues such as aging infrastructure, broadband access, and alternative energy build-outs. The Toro Company will benefit from this demand because they have the most comprehensive equipment lineup in the industry, which includes innovative solutions for new installations, as well as repair, rehabilitation, and replacement.
Resurgence in Golf. Management expects to benefit from the continued strength in golfing, as the demand is driven by sustained momentum in new golfers and rounds played. And this trend is not only in the United States, where a record-setting 26,6 million people played on a golf course in 2023. There has also been an 18% increase in the number of golfers participating in on-course golfing in markets outside North America. The Toro Company will benefit from this trend because it is uniquely positioned in the golf industry. It is the only company that provides both equipment and irrigation solutions, and it is the global market leader in both areas.
The Amplifying Maximum Productivity Program. The Toro Company has launched the Amplifying Maximum Productivity program, aimed at reducing costs by $100 million per year by fiscal year 2027. These savings will incrementally contribute to The Toro Company's gross margins and productivity improvements. Furthermore, management intends to reinvest up to 50% of this amount back into their business to further accelerate innovation and long-term growth. If management succeeds, The Toro Company will be more profitable in the future.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,13, which is from fiscal year 2023. I have selected a projected future EPS growth rate of 11% (Finbox expects EPS to grow by 17,3% per year over the next five years, but I'm not as optimistic.) Additionally, I have chosen a projected future P/E ratio of 22, which is twice the growth rate. This decision is based on the fact that The Toro Company has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $48,33. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy The Toro Company at a price of $24,17 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is called the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company is essentially its return on investment. The minimum annual return should be at least 10%. I calculate it as follows: The operating cash flow last year was 297, and the capital expenditures were 173. I attempted to analyze their annual report in order to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 121 in our calculations. The tax provision was 71. We have 103,843 outstanding shares. Hence, the calculation will be as follows: (297 – 121 + 71) / 103,843 x 10 = $23,79 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With The Toro Company's free cash flow per share at $1,51 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is $19,88.
Conclusion
I find The Toro Company to be an intriguing company because it is a market leader. The CEO has extensive experience in the company, which is always beneficial, but overpaid for the acquisition of The Intimidator Group. Hopefully, he has learned from his mistake and will not overpay for acquisitions in the future. The Toro Company is facing several risks. I'm not too concerned about macroeconomics because they will eventually improve. I am concerned about how the weather has affected The Toro Company's performance, as it is not something the company can mitigate. The same applies to the diverse factors in the Professional segment, where The Toro Company cannot do much to mitigate these risks. However, I believe these risks are primarily linked to macroeconomics, which means they will affect The Toro Company in cycles. I appreciate that The Toro Company will benefit from the sustained demand for underground and specialty construction, as well as the resurgence in golf, where the company holds a unique position. I also believe that the Amplifying Maximum Productivity program will have a positive impact on the company moving forward. The calculations in this analysis are based on a poor year for The Toro Company, which means they are likely lower than usual. Therefore, we may expect significantly higher figures in fiscal 2024. Nonetheless, I will only purchase shares in The Toro Company if it reaches the intrinsic value of the Margin of Safety price at $48,33.
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