Tickers in this Article: TTC, DE, HMC, BGG, LOW, HD, SMG, BRK.A
Lawn and turf care specialist Toro (NYSE:TTC) arguably could have picked a better time to focus on improving its cost structure and working capital requirements, as the turbulence in the housing market and overall economy had a big negative impact on equipment sales. Although the company still has low margins and a modest sales growth outlook, the company generates a fairly compelling stream of cash flow. Nevertheless, it does not leap out as a great buy candidate today.

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A Good Quarter, but Does Anybody Care?
Toro delivered a solid quarter, at least in respect to expectations. Revenue rose 9%, as the larger professional segment (up less than 6%) was boosted by the nearly 13% growth of the residential business. Toro easily topped out above the high end of Wall Street expectations, but this is not an especially well-followed stock.

The company's profits were also solid. Gross margin slid 60 basis points, largely on the same sort of higher input, freight and energy costs that have hurt most industrial and manufacturing companies. The company's operating expenses rose only 4%, though, and the company was able to post 67% operating income growth. Operating margins are still minuscule, though, at less than 3%. (Key figure include net income, gross profit and operating income. For more, see Understanding The Income Statement.)

Let it Snow, Let it Snow, Let it Snow
To a certain extent, Toro's grass-cutting sales are consistent. Demand from landscapers and golf courses is definitely economically-sensitive, but Toro is hardly the only company that needs a healthy economy to prosper. Likewise, Toro would certainly benefit from a healthier housing market as first-time home buyers are also often first-time lawnmower buyers.

For the next quarter or two, though, the company's snow removal equipment business is the X factor. If there is ample snowfall, people will likely find that they need to replace old equipment or finally make the move from shovel to snowblower. Likewise, if there are heavy snows in areas that don't typically get them. There's no point in trying to predict this; it will be what it will be and nobody knows at this point.

Ample Consistent Cash Flow
Toro certainly does not have the market to itself; companies like Deere (NYSE:DE), Briggs & Stratton (NYSE:BGG) and Honda (NYSE:HMC) are right there at local Lowes (NYSE:LOW), Home Depot (NYSE:HD) and True Value stores. Despite this competition, and despite the ups and downs of weather and the housing market, Toro nevertheless offers a compelling record of returns on capital and consistent cash flow generation.

If Toro wishes to do so, there's definitely the cash on hand to pay down debt, boost the dividend, buy back shares or some combination of the three. If management is wise, though, they will not push the share buyback idea too far; Toro's volume is already a little iffy and a big buyback could limit the ability of institutional investors to easily take positions.

Does This Lawn Care Play Make Sense as a Public Entity?
It is also worth wondering if Toro makes a lot of sense as a public company for the long term. Deere and Honda clearly do not depend upon lawn care or the residential business to drive their overall corporate goals. At the same time, both Toro and Scotts Miracle-Gro (NYSE:SMG) offer pretty solid returns on capital and well-known brands. With reasonable valuations, either could make a certain amount of sense to a private buyer or a conglomerate like Berkshire Hathaway (NYSE:BRK.A). (For related reading, see What Is Warren Buffett's Investing Style?)

The Bottom Line
Toro's stock price is in that gray area where it looks like a very good hold, but not such a compelling buy. Then again, that's predicated on an unimpressive revenue growth outlook of 3 to 4%. If Toro can outpace that modest expectation, the stock arguably ticks over into "buy" range.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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