TTC has jumped 10.5% in the last week - should you ride the wave?

November 5, 2018

TTC has jumped 10.5% in the last week – should you ride the wave?

A few months ago, I wrote about the The Toro Company (TTC) to evaluate the stock as a potential value play based on the stock’s 18% decline since August of 2017. At the time, the stock has trading in the low $60 range, and hovering in a narrow, sideway price channel.  In late September, the stock dropped below that channel to establish a new 52-week low a little below $54 per share; but since October 26 the stock has seen an impressive rally, climbing to nearly $60 as of Friday’s close. It’s a stock that has been undoubtedly been riding last week’s bullish wave, as investors seemed intent on trying to reverse a month-long slump in the market that pushed the Dow and NASDAQ into official correction territory, and the S&P 500 within spitting distance of it. Does that mean it’s a good time to think about jumping onboard now? Maybe; the company’s fundamentals remain solid, and have actually improved in many respects since the last time I looked at the stock. If the market is about to use its latest retracement to rally back to its all-time highs, the stock’s move in the last week could make it an interesting way to take advantage of that momentum. The value proposition is the thing that remains problematic for me; despite the improving fundamentals, the bargain argument just isn’t compelling to justify a long-term position yet.

The Toro Company (TTC) really is an interesting company; after all, this is a mid-cap Machinery stock with an easily recognizable brand. If you mow your lawn, enjoy gardening or landscaping, or have to deal with snow in the winter, there’s a good chance you are familiar with their products. TTC competes with other companies in the Machinery space like Deere & Co. (DE) and Briggs & Stratton (BGG), to name just a couple. Their business has a definite element of seasonality associated with it, and that could be a positive right now as we move into the colder months of the year. The company also boasts a diverse product portfolio that isn’t geared only to residential consumer, and that makes them an interesting alternative player versus DE in their industry.



Fundamental and Value Profile

The Toro Company (Toro) is engaged in the designing, manufacturing, and marketing of professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. The Company operates through three segments: Professional, Residential and Distribution. Under the Professional segment, Toro designs professional turf, landscape and lighting, rental and specialty construction, snow and ice management, and agricultural products. The Residential segment provides products, such as riding products, home solutions products and snow thrower products. It manufactures and markets various walk power mower models. The Distribution segment consists of Company-owned domestic distributorship. Its brands include Toro, Exmark, BOSS, Irritrol, Hayter, Pope, Unique Lighting Systems and Lawn-Boy. TTC’s current market cap is $6.3 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings  grew almost 11.5% while revenue growth was modest, posting an increase of 4.44%. Over the last quarter, earnings decreased more than 43% while revenues dropped about 25%. In addition, the company’s Net Income was about 10% over the past year, but improved to almost 12% in the last quarter.
  • Free Cash Flow: TTC’s free cash flow is healthy, at a little more than $274 million. This is a number that has declined since the first quarter of 2017 from a little above $340 million, but improved by almost $25 million from the quarter prior.
  • Debt to Equity: TTC has a debt/equity ratio of .48. Their balance sheet shows almost $251 million in cash and liquid assets versus about $312 million in long-term debt, which a pretty good indication that the company works with a conservative debt management philosophy. Given their healthy operating margins, they should have no problem servicing their debt.
  • Dividend: TTC pays an annual dividend of $.80 per share, which translates to a yield of about 1.34% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TTC is $6.18 and translates to a Price/Book ratio of 9.63 at the stock’s current price. Their historical average Price/Book ratio is 9.96, which provides a pretty strong argument for the fact that while the stock is slightly undervalued, it also isn’t a great value right now. I’m also not confident that under current conditions, including signs that steel and aluminum tariffs are making themselves felt on margins for industrial stocks, that the market is likely to start rotating into these stocks in the near future. My opinion on the stock’s value opportunity is about the same right now as it was in July: I would see a far more compelling value argument would be made with the stock in the $45 to $46 range – which is a level the stock hasn’t seen since late 2016.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The stock’s sideways range from April through August is pretty easy to identify on this chart; the stock’s strong move off of its fresh 52-week low a little below $54 has put the price right at the low end of that range. Conventional pivot analysis suggests the stock could be at an important inflection point, since previous support, once broken usually acts as resistance when the stock comes back into that range later. If that principle holds true now, don’t be surprised if the stock drops back quickly to test that 52-week low. If the stock’s current momentum can hold, and push the stock above the $60 mark, to about $60.50, it would also be reasonable to expect the stock to rally back to test its recent highs in the $64 range. If that happens, the bullish momentum that would be required to at this point to get the stock to that level could also act as a longer-term catalyst to drive the stock into an interesting upward trend.
  • Near-term Keys: If you’re looking for a way to take advantage of the bullish side of the market with TTC, look for a strong move above $60 before buying the stock or working with call options. If the stock pivots back down from its current level and breaks below $58, that could be a decent signal to short the stock or to consider buying put options with a target price around $54. If you’re a value-oriented investor like me, a break below $56 could be a good reason to start paying closer attention, with any kind of stabilization below $50 an area where the stock’s value proposition could become very attractive.