The Toro Company Is Running With The Bulls

The Toro Company Outpaces Consensus, And In The Off-Season

The Toro Company (NYSE:TTC) emerged as a clear winner in the push to stay at home and its share prices have benefited. The company makes a wide range of lawn and garden care products and, guess what, American’s did a lot of gardening last year. Results from Tractor Supply Company and Scott’s Miracle-Gro concur with that assessment, results in both companies are up substantially from the prior year and it looks like the momentum is being sustained. Surely there will be some pullback in the stay-at-home market as the economy reopens but there are still housing trends to be considered. There are a lot more yards to keep clean in America and The Toro Company is there to help get the job done.

The Toro Company Beats, Confirms Guidance

The Toro Company had a great quarter in that the $873 million in FQ1 revenue accelerated from the prior quarter and maintained the robust 14% YOY growth rate set therein. The Toro Company had a good quarter in that it beat the consensus by a relatively slim 250 basis point margin. While good, it’s not a wow number and did not spark a massive round of buying.

On a segment basis, both the Professional and Residential segments had positive results with Residential taking the lead. Sales in the Residential channels grew 31.3% and were driven by snow-related products in much of the operating territory. On the Pro end, sales of 0-turn lawnmowers to the landscaping industry produced the bulk of the gain. In both cases, the company’s cost-saving initiatives and spend-thrift attitude helped drive an increase in the margin.

In the Pro segment, margins widened by 80 basis points but the real news is in the residential end which increased by 180 basis points. The Residential segment is the fastest-growing segment and the one with the fastest growing margins providing the company with a significant lever for earnings. On the bottom line, both GAAP and adjusted earnings grew YOY and beat the consensus targets. The adjusted $0.85 beat by a dime while the GAAP EPS of $1.02 beat by a quarter dollar.

The company confirmed its guidance for 6% to 8% revenue growth but we think that is very cautious. Not only are trends within the housing market going to continue to drive gains but the company is also investing in the next generation of home-care technology. This includes IoT, connected, and autonomous devices and we like the sound of that.

The Toro Company Is Highly Valued With A Safe Dividend

The Toro Company is highly valued at 28X this year’s and 25X next year’s earnings but you do get a lot for what you pay for. Not only is the company growing but it is also a solid dividend payer that is increasing the distribution regularly. The dividend is yielding about 1.05% with shares at $99 which is not a lot, we know, but backed up by some very solid numbers. The company has been increasing the dividend for 17 years and just did so again so there is no reason not to expect the 18th increase next year. The company only pays out about 30% of its earnings and the balance sheet is very strong so there is no reason to think the company can’t pay its current dividend or not sustain another increase.

And that doesn’t count the growth outlook for earnings. And then there is the CAGR for the distribution itself which is in the range of 15%, a number we like to see in our dividend growth stocks. Bottom line? This dividend is safe and investors should expect another double-digit increase next year.

The Technical Outlook: The Toro Company May Have Topped Out

The fundamental outlook for The Toro Company is bullish but the technical outlook may have already priced it in. Trading at 28X and 25X earnings, the stock is not grossly overvalued relative to the broad market but it is high enough that profit-taking could be attractive. In that light, we think the pullback, if it is to materialize, will be a reset for the market and the bull run will be able to continue. If not this stock could keep moving up from here