The Toro Company is a leading provider of products and solutions for outdoor environments. With grass continuing to grow, snow continuing to fall, and infrastructure aging, the growth runway for The Toro Company appears substantial. Additionally, the company benefits from the regular replacement of its products, which generates recurring revenue. These factors suggest that The Toro Company could be an intriguing investment. In this analysis, I will explore whether investing in The Toro Company is the right decision.
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.
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 $50.
The Business
The Toro Company, established in 1914 in Minnesota, United States, is a global leader in the design, manufacture, marketing, and sale of a wide range of products for the outdoor environment. Its offerings span professional turf maintenance equipment, turf irrigation systems, landscaping tools, outdoor lighting, snow and ice management products, agricultural irrigation systems, specialty construction equipment, and residential yard care and snow thrower products. These products are distributed worldwide through a strong network of distributors, dealers, mass retailers, rental centers, home improvement stores, and direct sales to end-users such as states and municipalities. The company operates through two primary segments. The Professional segment, which generates approximately 78% of net sales, delivers higher margins and caters to specialized markets such as golf courses, professional contractors, groundskeepers, agricultural growers, and institutions. The Residential segment, accounting for about 22% of net sales, focuses on providing tools for homeowners, including yard maintenance and snow removal equipment. The Toro Company’s moat is rooted in its strong brand reputation, market leadership, extensive distribution and service network, and commitment to innovation. With over a century of history and 17 brands in its portfolio, including Toro, Ditch Witch, eXmark, Spartan, and BOSS, the company holds leading market share positions in many of its industries. Its robust distribution network - supported by long-standing relationships with dealers, distributors, and strategic retail partners like Lowe’s - ensures widespread product availability and exceptional service across more than 125 countries, creating high barriers to entry for competitors. The company benefits from recurring revenue streams driven by predictable product replacement cycles due to wear and tear, snow removal demands, and the aging of infrastructure. Additionally, it generates complementary revenue from parts, repair services, and extended warranties. Its diversified portfolio allows it to navigate macroeconomic fluctuations effectively, as demand for its products is underpinned by consistent factors such as grass growth, snowfall, and the need for infrastructure maintenance and upgrades. Approximately 80% of The Toro Company’s sales are generated in the United States, with the remaining 20% coming from international markets.
Management
Richard Olson is the CEO of The Toro Company, a role he has held since November 2016. He joined The Toro Company in 1986 as a manufacturing process engineer and steadily progressed through various leadership roles, including general manager of Exmark, vice president of international business, and president and COO. Richard Olson holds a Bachelor of Science in Industrial Technology from Iowa State University and an MBA from the University of Minnesota’s Carlson School of Management. Under Richard Olson’s leadership, The Toro Company has significantly expanded its product portfolio, entered new markets, and increased its focus on innovation and sustainability. Notable achievements include key acquisitions such as Charles Machine Works (Ditch Witch), Ventrac, and Intimidator Group. These acquisitions have broadened The Toro Company’s offerings in landscaping, specialty construction, and agricultural markets. Richard Olson has also overseen advancements in autonomous and connected technologies, enhancing The Toro Company’s competitive edge in the outdoor equipment industry. Richard Olson is committed to The Toro Company’s core values of integrity, customer focus, and operational excellence. He emphasizes collaboration and resilience as key drivers of success and continues to steer the company toward long-term growth and sustainability. While his tenure has been marked by accomplishments, challenges remain. A recent goodwill charge of over $150 million related to the $400 million acquisition of the Intimidator Group has raised questions about overpayment and the valuation of strategic investments. Employee sentiment under Richard Olson’s leadership offers mixed insights. On Comparably, he has an employee rating of 66/100, placing him in the top 50% of CEOs at similar-sized companies. However, his Glassdoor approval rating is a much higher 96%, reflecting a strong level of confidence and respect from employees. Despite these challenges, Richard Olson’s nearly four decades of dedication to The Toro Company and his proven ability to drive innovation, expand market share, and maintain operational excellence position him as a capable leader. As he continues to prioritize sustainability, customer-centric solutions, and strategic growth initiatives, Richard Olson appears well-equipped to guide The Toro Company toward continued success in the future.
The Numbers
The first metric we will investigate is the return on invested capital, or ROIC. Ideally, a 10-year history of ROIC consistently exceeding 10% demonstrates strong financial performance. The Toro Company has achieved a ROIC above 10% for the past ten years, which is a positive sign of its financial health and operational efficiency. However, it is slightly concerning that the company reached its peak ROIC in 2017 and has not managed to return to that level since. In 2021, The Toro Company delivered a ROIC in the 20s, but it has since declined, with the past two fiscal years reflecting the lowest ROIC in the decade. Despite this, there are encouraging signs as ROIC improved in fiscal year 2024 compared to fiscal year 2023. The decline in ROIC over the past three years can be attributed to a combination of factors, including the acquisition of The Intimidator Group and broader macroeconomic challenges that have impacted many companies during 2022, 2023, and 2024. Management has stated that they are actively working to align business operations to improve financial metrics like ROIC. With these measures in place, I believe The Toro Company has the potential to increase its ROIC over the next few years.
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, as The Toro Company has managed to increase its equity every year for the past decade - an achievement accomplished by only a select few companies. While the year-over-year growth has been somewhat volatile, ranging from a high of 27,9% to a low of 2,9%, this variability is not concerning. What stands out is that equity has grown at a compounded annual growth rate of over 12%, which is remarkable. I’m genuinely impressed by these figures. The Toro Company serves as a textbook example of how equity growth should look - consistent, sustainable, and a reflection of strong financial management and operational success.
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. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. 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 over the past decade. While the company faced challenging years in 2022 and 2023, during which free cash flow was significantly lower than in prior years, it managed to deliver a record-high free cash flow in 2024. This is a very encouraging development, highlighting The Toro Company’s ability to rebound and execute effectively even under tough market conditions. The company prioritizes using some of its free cash flow for dividends and share repurchases, which has led to a 6% annual increase in dividends over the past two years, alongside an expansion of its share repurchase program. If free cash flow continues to grow, shareholders can expect further increases in dividends and more robust share repurchase activity, enhancing shareholder returns. The levered free cash flow margin also increased significantly in 2024, which is another positive sign. It suggests that management’s focus on operational efficiencies and cost-saving measures is bearing fruit. I expect that the margin will soon return to previous highs as these efforts continue. Additionally, the free cash flow yield is at its highest level since 2021 and above the ten-year average. This suggests that the shares may be trading at an attractive valuation, but this is a point that will be explored further 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. This can be assessed by dividing total long-term debt by earnings. After performing the calculation for The Toro Company, I found that the company has 2,18 years of earnings in debt. This is below the three-year threshold, which indicates that debt is not a concern if I were to invest in The Toro Company. The company has only had one year in the past decade where its debt-to-earnings ratio exceeded the three-year threshold, and this was primarily due to the acquisition of The Intimidator Group. This suggests that The Toro Company generally maintains a disciplined approach to debt management.
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Risks
Macroeconomic factors pose a significant risk to The Toro Company, as they have the potential to negatively affect its sales, earnings, and overall financial performance. Economic slowdowns or recessions can dampen demand for products across both its Professional and Residential segments. Declining consumer confidence, higher interest rates, and inflationary pressures influence purchasing decisions, especially for discretionary items like lawn care equipment and golf course maintenance tools. Additionally, reduced government or municipal spending can impact large-scale infrastructure projects and landscaping activities, which are vital to the Professional segment's success. Industries served by The Toro Company, such as golf courses and homeownership-related markets, are particularly vulnerable to economic fluctuations. Declines in golf course development, renovations, and general activity - driven by tighter budgets or closures - can reduce demand for turf maintenance and irrigation products. Similarly, slowdowns in home construction, reduced homeownership rates, or cautious spending by homeowners have historically weakened sales in lawn care and residential products. Macroeconomic conditions have also created cost pressures for The Toro Company, including inflation, rising commodity prices, increased transportation costs, and supply chain disruptions. These factors can lead to higher production expenses, longer lead times, and reduced product availability, all of which can strain profit margins and earnings further.
Weather conditions present a significant risk to The Toro Company due to their strong influence on demand for its products. Seasonal and regional weather patterns heavily impact the company’s sales, making its revenue particularly susceptible to climate variability. For instance, prolonged droughts or unusually wet conditions can reduce the need for Residential and Professional mowing equipment, while severe droughts - often accompanied by watering restrictions - can drastically diminish sales of irrigation products. Similarly, lower-than-average snowfall in key regions directly impacts the sales of snow throwers and snow and ice management equipment, particularly in the Professional segment. When snowfall levels remain below average for consecutive seasons, as recently experienced, shipments of higher-margin snow products decline, putting additional pressure on profitability. These weather-related fluctuations in demand can also have a cascading effect across multiple seasons. For example, landscape contractor professionals who see reduced revenues during low-snowfall winters may delay or cancel purchases of spring-season equipment, such as mowing tools. This creates further challenges for The Toro Company’s ability to stabilize sales across its product portfolio. The risks associated with adverse weather conditions are compounded by the increasing frequency and unpredictability of extreme weather events tied to climate change. Irregular weather patterns and growing climate volatility exacerbate demand fluctuations, amplifying The Toro Company’s exposure to seasonal and regional shifts.
The Professional segment faces significant risks due to its dependence on external factors that influence demand across key industries, including golf course maintenance, landscaping, and infrastructure construction. In the golf market, declining interest in the sport, fewer rounds played, shrinking memberships, and reduced revenues from ancillary services such as dining and events can lead to lower spending on course maintenance, renovations, and equipment upgrades. This is particularly concerning given the segment's reliance on golf courses as a significant customer base. Property maintenance and construction activity also serve as critical demand drivers for the Professional segment. Economic downturns, reduced consumer and business spending, and budgetary constraints can weaken demand for products such as lawn care equipment, snow removal tools, and specialty construction machinery. For example, decreased infrastructure and utility construction activity in industries like oil, gas, and telecommunications can lead to reduced sales of The Toro Company’s niche equipment offerings, such as trenchers and horizontal directional drills. Agricultural irrigation presents additional risks, as declining adoption of irrigation solutions due to cost concerns or changing agricultural practices can negatively impact sales. Furthermore, budgetary limitations among government and municipal customers could result in reduced spending on grounds maintenance, landscaping, or public construction projects, further affecting the Professional segment’s revenues. The success of the Professional segment is closely tied to the health and stability of these end markets. Any prolonged challenges in golf, property maintenance, construction, agriculture, or municipal spending could result in significant declines in demand, negatively impacting The Toro Company’s net sales and profitability.
Reasons to invest
New product innovation is a strong reason to consider investing in The Toro Company, as the company consistently develops solutions that align with evolving market trends, customer needs, and growth opportunities. Recent product launches have delivered impressive results, contributing to top-line growth in both the Residential and Professional segments. For instance, the Exmark Laser Z professional-grade zero-turn mowers, featuring advanced Adapt technology, have raised the bar for productivity and reliability in professional landscaping, garnering enthusiastic feedback from dealers and customers. The Toro Company’s strategic focus on advanced technologies, such as autonomous systems, alternative power sources, and connected solutions, enhances its competitive edge and positions the company as a forward-looking leader in the outdoor equipment industry. Upcoming launches, including the Toro Haven Robotic Mower, the Exmark Turf Tracer equipped with XiQ technology, and the GeoLink Solutions Autonomous Fairway Mower, directly address critical market challenges like labor shortages and the demand for higher efficiency. For customers managing golf courses, municipal properties, or other large-scale facilities, these high-productivity machines, particularly autonomous and semi-autonomous solutions, provide compelling returns on investment and are likely to see increasing adoption. The Toro Company’s ability to leverage its innovative capabilities across its broad product portfolio creates synergies that enhance customer outcomes while supporting sustained growth. By investing strategically in technologies that improve efficiency, solve labor challenges, and meet sustainability objectives, the company ensures continued demand for its products.
Global trends present a compelling reason to invest in The Toro Company, as the company is strategically positioned to capitalize on long-term opportunities in underground construction, infrastructure upgrades, and the sustained growth of the global golf industry. In underground construction, essential projects such as data communication infrastructure expansion, energy grid modernization, and the replacement of aging infrastructure are driving robust demand. Public and private multi-year spending on these critical areas creates a clear and durable runway for growth. The Toro Company’s extensive product portfolio, including Ditch Witch and Toro Dingo, coupled with its leadership in the underground construction market, positions it to capture a significant share of this expanding sector. Infrastructure spending continues to surpass other construction categories, further fueling demand for The Toro Company’s Specialty Construction products, such as compact utility loaders. This segment has already demonstrated strong recovery and is set to benefit further from continued global investment in infrastructure. The company’s ability to deliver innovative, efficient solutions ensures it remains a preferred partner in this space. The global golf industry also represents a substantial growth opportunity. Record rounds played in recent years, along with a 44% increase in international golfers since 2016, underscore the sector's resilience and ongoing momentum. The Toro Company’s leadership in golf equipment and irrigation provides it with a distinct competitive edge. Increasing investments in golf course maintenance, irrigation systems, and new course developments further support demand for its products.
The Amplifying Maximum Productivity (AMP) program is a compelling reason to consider investing in The Toro Company, as it underscores the company’s focus on enhancing profitability, operational efficiency, and long-term growth. With a target of delivering $100 million in annualized cost savings by fiscal year 2027, the AMP program has already outperformed expectations, achieving $14,5 million in its first year. These savings are poised to drive gross margin improvements, while management’s plan to reinvest up to 50% of these savings into innovation and growth initiatives ensures the company remains competitive and aligned with evolving market demands. The "AMP It Up" initiative further reinforces this strategic focus by uniting the organization around shared goals of productivity and profitability. By incentivizing employees to identify cost-saving opportunities and streamline operations, this initiative supports The Toro Company’s ambitious internal goal of achieving a 14% adjusted operating margin by fiscal year 2026. This cultural emphasis on embedding profitability into day-to-day operations strengthens the company’s resilience, even during periods of slower revenue growth. Beyond cost savings, the AMP program also fuels innovation by enabling reinvestment into advanced technologies, such as autonomous solutions and connected systems, which are critical drivers of future growth.
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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 4,01, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 8% (Finbox expects EPS to grow by 8,2% per year over the next five years.) Additionally, I have chosen a projected future P/E ratio of 16, 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 $34,24. 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 $17,12 (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 482, and the capital expenditures were 107. I attempted to analyze their annual report 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 75 in our calculations. The tax provision was 94. We have 101,5 outstanding shares. Hence, the calculation will be as follows: (482 – 75 + 94) / 101,5 x 10 = $49,36 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 $4,54 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $52,15.
Conclusion
I find The Toro Company to be an intriguing business due to its position as a market leader and its consistent ability to deliver a high ROIC, which is expected to improve in the coming years. In 2024, the company achieved record-high free cash flow, and its levered free cash flow margin has shown significant improvement over the past year. The leadership of the CEO, who brings extensive experience within the company, is a valuable asset. However, the overpayment for the acquisition of The Intimidator Group was a notable misstep, though it is hoped that management has learned lessons to avoid similar issues in the future. Macroeconomic factors pose a significant risk for The Toro Company, as economic slowdowns, inflation, and reduced consumer or government spending can weaken demand for its products. This is particularly true for discretionary and infrastructure-related markets such as lawn care, golf courses, and construction. Weather conditions also present substantial risks, as sales are highly sensitive to seasonal and regional patterns. Droughts, excessive rainfall, or below-average snowfall can negatively affect demand for core products like mowing equipment, irrigation systems, and snow throwers. Additionally, the Professional segment faces challenges due to its reliance on industries such as golf, property maintenance, construction, and agriculture, which are heavily influenced by economic conditions and budgetary constraints. Despite these risks, The Toro Company's ability to innovate and align with market trends provides a strong foundation for growth in both its Residential and Professional segments. The company is well-positioned to capitalize on global opportunities in underground construction, infrastructure upgrades, and the expanding golf industry. Furthermore, the Amplifying Maximum Productivity program, which aims to achieve $100 million in annual cost savings by fiscal 2027, is a strategic initiative that enhances profitability and operational efficiency. With up to 50% of these savings reinvested into innovation, the program ensures that The Toro Company remains competitive while positioning it for long-term success and resilience. Overall, The Toro Company presents many compelling attributes as an investment. Purchasing shares at the Ten Cap price of $49 could represent a strong long-term opportunity for investors.
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