TTC is down 18% for the year, and consolidating. Is it a great buy?

July 25, 2018

TTC is down 18% for the year, and consolidating. Is it a great buy?

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One of the biggest challenges all investors face is finding stocks to invest in. It isn’t just about picking a stock out of the thousands that are available, but also trying to figure out when the time is right to make the investment. Momentum and trend traders like to try to time the swings from high to low extremes within price trends to place short-term trades, while investors with a longer time period in mind usually look at the fundamental strength of the underlying business. Value-oriented investing, which is the approach I prefer and write about, incorporates aspects aspects of both trend and fundamental analysis to determine if a stock’s current price is lower than it should be. It doesn’t mean the stock is guaranteed to go up, of course, but it does provide a pretty good way to build a case for whether a stock is worth the bother right now, later, or even at all.

The Toro Company (TTC) is an interesting case study. This is a mid-cap Machinery company 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; in their most recent quarterly earnings report, for example, the company cited a more-temperate-than-expected winter, in many parts of the country along with a delayed start to spring as factors that impacted revenues and earnings in the quarter. Even so, the company also has a diverse product portfolio that makes them an interesting player. The stock’s price is also down for the last twelve months, having hit a high price at around $73 in August of last year before dropping quickly to a range somewhere between $56 on the low side and around $62 on the high end. The stock is roughly the middle of that range right now and has been holding this sideways pattern for the past few months. 

The stock’s current, and somewhat extended, sideways pattern marks a consolidation of price that usually gets technical traders to start paying a little more attention, since stocks inevitably find a reason to break out of consolidation ranges to establish new trends. When the stock is trading significantly below its historical levels, technical traders usually look at a consolidation pattern as a bullish indication and will start looking for a strong upside breakout signal to place a trade. As a value investor, consolidation makes me check a stock’s fundamentals to determine if there is a strong argument that the stock should move higher over either an intermediate or long-term perspective, and if the value proposition isn’t compelling enough right now, what is the price at which I think the stock is a good buy.



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 more than 11% while revenue growth was mostly flat, posting an increase of .29%. TTC operates with a narrow margin profile of about 1%. The results are more encouraging over the last quarter, where earnings grew 150% and revenues improved almost 60%. In addition, the company’s Net Income was about 10% over the past year, but improved to almost 15% in the last quarter.
  • Free Cash Flow: TTC’s free cash flow is healthy, at a little more than $257 million. This is a number that has declined over the past year from a little above $340 million.
  • Debt to Equity: TTC has a debt/equity ratio of .48. Their balance sheet shows about $206 million in cash and liquid assets versus about $300 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 1.33% 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 $5.81 and translates to a Price/Book ratio of 10.29 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 isn’t overvalued, it also isn’t a great value right now. I’m also not confident that under current conditions, with some early signs that steel and aluminum tariffs are starting to squeeze margins for industrial stocks, that the market is likely to start rotating into these stocks in the near future. A more compelling value argument in my mind 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 red diagonal line measures the length of the stock’s long-term downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. As I observed earlier, the stock is currently hovering in a range between about $56 (range support) and $62 (range resistance). That range has been pretty persistent since April of this year. In order to reverse its long-term downward trend, the stock would need to break out of that range and move above the $63 area marked by the 38.2% retracement line. A break below $56 would reconfirm the long-term trend’s strength and could see the stock drop down into the $46 to $49 range.
  • 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 $63 before buying the stock or working with call options. If the stock does break below $56, that could be a good signal to short the stock or to consider buying put options. If you’re a value-oriented investor like me, a break below $56 could be a good reason to start paying closer attention, with stabilization below $50 an area where the stock’s value proposition could become very attractive.