This Company Isn't Sexy... But Its 55% Upside Sure Is
When I was a kid, it was a privilege to be allowed to mow the lawn. I recall the enjoyment of using the walk-behind lawn mower to tackle our half-acre of grass in 100-degree heat.
Nowadays, mowing the lawn is a chore, often outsourced to landscaping companies or local teenagers looking to score summertime spending . Regardless of how it gets done, it remains something that has to be done.
The turf management industry isn't all that sexy, so the companies in the industry don't always get the respect they deserve. One such company is Toro (NYSE: TTC).
It's easy to overlook this stock, but it's proven to be one you can in your portfolio and simply forget about, exactly what we look for in our 10 Best To Hold Forever. (Check out our report here.) And for Toro, if you left it alone for the last three years, something we recommend for our "Forever ," you would have seen it climb more than 90%, compared with the S&P 500 's 45% .
Toro designs and makes turf maintenance equipment for residential, golf course, agricultural and sports field customers. The company has been around for a long time, with next year marking its centennial. Toro also has major partnerships with the Wimbledon Championships, the Super Bowl and Rose Bowl, and the Walt Disney World Resort.
Toro already has a strong footprint in the U.S. market remains robust and offers a recurring revenue stream: The replacement market in the U.S. for walk-behind mowers is an impressive 4.5 million to 6.5 million units a year., with leading positions in the professional and residential consumer segments. Toro also continues to ground with individual residential customers thanks to its "zero-turn" mowers. The walk-behind mower
One of Toro's markets poised to rebound the fastest is golf-related products. The economy strengthens, look for golf course operators to increase their spending. This should remain a stable market for Toro as existing courses seek equipment and irrigation replacement, not to mention the new golf course development in international markets.of golf-related equipment was hit hard as golf course operators tightened spending during the economic downturn. As the
Serious International Potential
International sales made up some 30% of sales in fiscal 2012, compared with 20% in 2004. Part of this has come from acquisitions. Even still, there remains some very big opportunities in overseas markets. Toro has been in new product designs that are specifically for international markets.
The other big benefit to international growth is that it should lead to operating margin of around 17.5%, compared with residential's 8%. And so, Toro's international expansion has the potential to be a win-win, with higher sales and higher margins.expansion. The majority of sales in overseas markets are in Toro's professional segment, not residential. The professional segment generates an
Even for a company that makes lawn mowers, you can still see innovation alive and well. The company is currently generating close to 40% of sales from new products, above its long-term goal of 35%. This comes as the company continues to invest around 3% of sales in new product development. Thanks to this continued innovation, Toro is generating returns on equity at decade highs, currently above 40% on a trailing 12-month .
A game-changer for Toro could prove to be its international irrigation business. The micro-irrigation segment is a $2 billion market worldwide, and this market is growing at 10% annually, given water and food remain scarce in many undeveloped and emerging countries. Micro-irrigation requires less acreage than flooding and sprinklers and is more efficient.
On fiscal 2014 EBITDA ( before interest, , and ) estimates of $325 million, and using a justified enterprise value-to-EBITDA of 15, Toro's is roughly $85, a nearly 55% premium to its current price near $55 a share. The stock -- which offers a 1% -- has remained resilient over the past decade and should continue this trend.
Drought conditions coulda strain on Toro's sales. The company is also somewhat reliant on steel prices, with steel being the largest contributor to cost of goods sold. A sharp rise in steel prices could squeeze margins.