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Ride Toro To Better Days
Investopedia contributor Greg Sushinsky's March 17 article about Connecticut-based toolmaker Stanley Works (NYSE:SWK) painted a bleak picture for any business operating in the durable household goods sector... which got me wondering if any companies in this hard-hit sector are worth considering right now. Toro (NYSE:TTC), a manufacturer of golf maintenance equipment and other products came to mind, for it has kept its head above water despite the recession. At the end of the day, golfers play courses in part because of appearance and maintenance. A shabby-looking track just isn't worth the time or money and owners know this. However and most unfortunately, Toro's recent experiences differ little from those of Stanley Works.
IN PICTURES: Eight Ways To Survive A Market Downturn
Listless Revenue
Toro's 2008 revenues totaled $1.88 billion, virtually identical to those in 2007 and only $230 million more than 2004 revenues. There's no growth story here. But despite the recession, the company still earned $120 million, or $3.10 per share, in 2008, which provided shareholders a 32.6% return on equity (ROE). In 2004, its ROE comprised 23.5%. If it could get back to its 36.1% gross margins from 2007, flat sales or not, business would be good. As for Toro's most recent results, the first quarter wasn't pretty. Revenues totaled $340.2 million, down 16.2% from $405.8 million. The bottom line was no different, with net earnings of $6.7 million, down 64% from $18.6 million in January 2008. CEO Michael Hoffman commented that the company is managing inventory, cutting expenses, including short-term borrowings, and operating conservatively in its business plan.
Delayed Investments By Golf Course Owners
And for good reason! Toro's professional segment revenue, which includes golf maintenance equipment, was down 22.3% in the first quarter due to golf courses delaying new investments. Meanwhile, its residential segment actually saw a slight increase in sales in Q1 due to a strong demand for snowblowers. Even more encouraging, while the professional segment's earnings were down 41.5% year-over-year to $30.1 million, the residential segment saw its bottom line improve 26.8% to $4.8 million. Once golf course owners see an improvement in the economy, they'll be making the necessary capital investments on the professional side, which accounts for about two-thirds of Toro's revenue. And with those sales should come increased gross margins, which were off by 200 basis points from Q1 2008. Looking ahead to its full-year numbers in 2009, Toro management expects revenues to decline 15% and earnings per share to drop between 35% and 45%, to the $1.75 to $2.00 range.
Ideal Valuation
Toro is taking the necessary steps to ride out this recession. In February, the company announced cuts to its overall workforce by more than 10% through voluntary retirements and job cuts. While belt tightening is never a fun process, it's comforting to know that Toro executive officers are taking 10% pay cuts in 2009. The time is ideal for looking at Toro stock, as the company is keeping its business cost-competitive while hanging on to profits. Current price-to-sales and price-to-book ratios are as low as they've been since 2003 and its enterprise value is just 4.7x EBITDA, lower than many of its competitors. (Read A Clear Look At EBITDA for more on this metric.)
Bottom Line
Now may not be Toro's most successful period in its history, but it's certainly one of the best times to be buying its stock.
IN PICTURES: Eight Ways To Survive A Market Downturn
Listless Revenue
Toro's 2008 revenues totaled $1.88 billion, virtually identical to those in 2007 and only $230 million more than 2004 revenues. There's no growth story here. But despite the recession, the company still earned $120 million, or $3.10 per share, in 2008, which provided shareholders a 32.6% return on equity (ROE). In 2004, its ROE comprised 23.5%. If it could get back to its 36.1% gross margins from 2007, flat sales or not, business would be good. As for Toro's most recent results, the first quarter wasn't pretty. Revenues totaled $340.2 million, down 16.2% from $405.8 million. The bottom line was no different, with net earnings of $6.7 million, down 64% from $18.6 million in January 2008. CEO Michael Hoffman commented that the company is managing inventory, cutting expenses, including short-term borrowings, and operating conservatively in its business plan.
And for good reason! Toro's professional segment revenue, which includes golf maintenance equipment, was down 22.3% in the first quarter due to golf courses delaying new investments. Meanwhile, its residential segment actually saw a slight increase in sales in Q1 due to a strong demand for snowblowers. Even more encouraging, while the professional segment's earnings were down 41.5% year-over-year to $30.1 million, the residential segment saw its bottom line improve 26.8% to $4.8 million. Once golf course owners see an improvement in the economy, they'll be making the necessary capital investments on the professional side, which accounts for about two-thirds of Toro's revenue. And with those sales should come increased gross margins, which were off by 200 basis points from Q1 2008. Looking ahead to its full-year numbers in 2009, Toro management expects revenues to decline 15% and earnings per share to drop between 35% and 45%, to the $1.75 to $2.00 range.
Ideal Valuation
Toro is taking the necessary steps to ride out this recession. In February, the company announced cuts to its overall workforce by more than 10% through voluntary retirements and job cuts. While belt tightening is never a fun process, it's comforting to know that Toro executive officers are taking 10% pay cuts in 2009. The time is ideal for looking at Toro stock, as the company is keeping its business cost-competitive while hanging on to profits. Current price-to-sales and price-to-book ratios are as low as they've been since 2003 and its enterprise value is just 4.7x EBITDA, lower than many of its competitors. (Read A Clear Look At EBITDA for more on this metric.)
|
Company |
EV/EBITDA |
|
Toro (NYSE:TTC) |
4.71 |
|
Snap-On (NYSE:SNA) |
4.31 |
|
The |
6.00 |
|
Briggs & Stratton (NYSE:BGG) |
8.20 |
|
Caterpillar (NYSE:CAT) |
8.18 |
|
John Deere (NYSE:DE) |
11.59 |
|
Data as of market close April 21, 2009. |
|
Bottom Line
Now may not be Toro's most successful period in its history, but it's certainly one of the best times to be buying its stock.
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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