Over the past six months, The Toro Company has been a great trade, beating the S&P 500 by 15.5%. Its stock price has climbed to $88.74, representing a healthy 26.8% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy The Toro Company, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is The Toro Company Not Exciting?
Despite the momentum, we don't have much confidence in The Toro Company. Here are three reasons why TTC doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, The Toro Company’s 5.5% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector.
2. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, The Toro Company’s operating margin decreased by 2.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 9.2%.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, The Toro Company’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
The Toro Company’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 19× forward P/E (or $88.74 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.
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