Streetwise for Friday, September 29, 2017

A degree of uncertainty and volatility are part and parcel of the investment world. That has always been the case and it always will be. Therefore, it is up to you to select from an abundance of what might be considered lemons, from which you can make lemonade.

Consider, for example, Toro (TTC) a leading worldwide provider of solutions for the outdoor environment. With sales of $2.4 billion for fiscal 2016 ended October 31, Toro’s global presence extends to more than 90 countries.

The company has built a legacy of excellence as it assists in caring for golf courses, landscapes, sports fields, public green spaces, commercial and residential properties and agricultural fields.

When I last wrote about Toro a year ago, my post-split earnings estimate was $2.01 per share with a 12-month target price of $51.50, for a potential gain of about 10 percent.

So how did the company do? Earnings for the 2016 fiscal year ended October 31, came in at $2.06 per share and the shares recently closed at $61.17.

Looking at some more recent data, Toro posted third-quarter fiscal 2017, ended August 4, earnings of 61 cents per share, up 22 percent from 50 cents recorded in the same period a year ago. Quarterly net sales increased 4.5 percent year-over-year (YoY)to $627.9 million.

Cost of sales during the quarter increased 4.4 percent YoY to $401 million, while gross earnings were $226.8 million, up 4.7 percent YoY. The company’s gross profit margin improved by 10 basis points or 0.1 percent to 36 percent, primarily supported by segment mix and productivity improvements.

Selling, general and administrative expenses were up 3 percent to $139 million. Operating profit improved by 7 percent YoY to $87.8 million, while the company’s operating margin increased by 40 basis points or 0.40 percent YoY.

At the end of the third quarter, Toro reported cash and cash equivalents of $335 million, as compared to $277 million recorded in the same period a year ago. The company generated cash flow from operations of $272 million for the nine-month period ended August 4, as compared to $304 million recorded a year ago.

Long-term debt, excluding the current portion (debt coming due in less than a year), was $308.8 million as of August 4, as compared to $331.6 million on July 29, 2016.

Toro’s accounts receivables were $221.6 million at the end of the third quarter, up 9.5 percent on a YoY basis. The company’s net inventories were $349.0 million, up 6.7 percent. Working capital, as a percentage of sales, stood at a 12-month rolling average of 14 percent, down from 16.4 percent versus a year ago. You might want to watch those numbers going forward.

Toro’s professional segment saw net sales climb 9.5 percent YoY to $468.6 million, helped by the momentum of its landscape contractor, golf and grounds, and international businesses. However, that strength was offset by a 9.3 percent decline in sales from Toro’s smaller residential segment to $152.1 million.

The residential decline was due to a shift in timing of its “Toro Days” sales promotion to the fiscal second quarter (it was held in April instead of May this year), and higher sales of its professional-grade zero-turn riding mowers to homeowners.

According to management, Toro is encouraged by what it is seeing. Residential snow thrower sales have been strong ahead of the upcoming Winter season, and new products from Toro’s BOSS line leave it well positioned to take advantage of the growing demand from contractors.

Toro raised its outlook for fiscal 2017 earnings to $2.38 per share from the previous guidance of $2.35 per share. The company has maintained its revenue growth guidance of 4.5 percent for the current fiscal year.

Toro’s performance is triple that of its industry. The intrinsic value of the shares using the free cash flow to the firm model is $146. My fiscal 2018 earnings estimate is $2.50 per share with a 12-month target price of $68, for a gain of about 10 percent. There is also an indicated dividend yield of 1.13 percent.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.