TTC Stock Study (10-3-23)

I recently did a stock study on the Toro Co. (TTC) with a closing price of $82.85. The original study is here.

M* writes:

     > The Toro Co manufactures turf maintenance and landscaping equipment.
     > The company produces reel and rotary riding products, trim cutting and
     > walking mowers, greens rollers, turf sprayer equipment, underground
     > irrigation systems, heavy-duty walk-behind mowers, and sprinkler systems
     > used for professional turf and landscape maintenance and construction.
     > Its products are marketed through a network of distributors and dealers
     > to primarily professional users maintaining turfs and sports fields such
     > as golf courses. Its operating segments are Professional and
     > Residential. The company also produces snow plowers and ice
     > management products. Its largest end market is the United States.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 8.8% and 13.0%, respectively. Lines are mostly up, straight, and parallel without a single YOY decline. PTPM lags peers and leads industry averages while ranging from 10.3% in ’19 to 14.2% in ’18 with a last-5-year mean of 12.3%.

Also over the past decade, ROE leads peer and industry averages despite falling from 39.3% (’13) to 33.9% (’22) with a last-5-year mean of 33.9%. Debt-to-Capital is higher than peer and industry averages with a last-5-year average of 40.9%.

Interest Coverage is 9.3 and Quick Ratio is 0.59. Value Line rates the company B++ for Financial Strength.

With regard to sales growth:

• CNN Business projects 6.7% YOY and 6.5% per year for ’23 and ’22-’24, respectively (based on 5 analysts).
• YF projects YOY 1.1% and 5.3% for ’23 and ’24, respectively (6 analysts).
• Zacks projects YOY 1.7% and 3.7% for ’23 and ’24, respectively (3).
• Value Line projects 6.9% annualized growth from ’22-’27.
• CFRA projects 1.1% YOY and 1.7% per year for ’23 and ’22-’24, respectively.

I am forecasting below the long-term estimates at 5.0% per year.

With regard to EPS growth:

• CNN Business projects 13.8% YOY and 12.3% per year for ’23 and ’22-’24, respectively (based on 5 analysts), along with 5-year annualized growth of 10.2%.
• MarketWatch projects 4.5% and 4.9% per year for ’22-’24 and ’22-’25, respectively (7 analysts).
• Nasdaq.com projects 16.2% and 11.7% per year for ’23-’25 and ’23-’26 (4, 4, and 2 analysts for ’23, ’25, and ’26).
• YF projects YOY 2.9% contraction and 11.5% growth for ’23 and ’24, respectively (7), along with 5-year annualized growth of 10.2%.
• Zacks projects YOY 2.9% contraction and 13.7% growth for ’23 and ’24, respectively (4).
• Value Line projects annualized growth of 10.8% from ’22-’27.
• CFRA projects 0.7% YOY contraction and 3.0% growth/year for ’23 and ’22-’24 along with a 3-year CAGR of 7.0%.

I am forecasting below the long-term estimate range (mean of three: 10.2%) at 8.0% per year. I will use 2023 Q3 EPS of $3.58/share (annualized) as the initial value rather than ’22 EPS of $4.20.

My Forecast High P/E is 24.0. Over the past decade, high P/E ranges from 21.4 in ’15 to 31.3 in ’21 with a last-5-year mean of 28.8. The last-5-year-mean average P/E is 24.2. I am forecasting just under the latter.

My Forecast Low P/E is 18.0. Over the past decade, low P/E ranges from 15.4 in ’13 to 21.7 in ’21 with a last-5-year mean of 19.7. I am forecasting below the latter.

My Low Stock Price Forecast (LSPF) of $64.40 is default based on $3.58/share initial value. This is 22.3% less than the previous closing price and 17.8% less than the 52-week low. While this is substantially lower than the latter, I stick to the 20.0% guideline; a small denominator is an easy way to bias U/D in favor of BUY.

Over the past decade, the lowest Payout Ratio is 21.4% in ’13 and the last-5-year mean is 31.4%. I am forecasting below the range at 21.0%.

These inputs land TTC in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 8.7%.

PAR (using Forecast Average—not High—P/E) of 5.9% is less than I seek in a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 74 studies (my study and 19 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 7.7%, 9.1%, 27.1, 18.7, and 31.3%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 18.0 is less than MS (22.9) and less than mine (21.0).

MS high / low EPS are $6.80 / $4.48 versus my $5.02 / $3.58 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS is greater than both at $7.00.

MS LSPF of $73.70 implies a Forecast Low P/E of 16.5: less than the above-stated 17.8. MS LSPF is 12.0% less than the default $4.48/share * 18.7 = $83.78 [invalid on today’s date]. This results in more conservative zoning. MS LSPF is still 14.4% greater than mine.

My TAR (over 15.0% preferred) is much less than the 15.4% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 3.1 per my projected P/E: significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is neutral at 0.95. Kim Butcher’s “quick and dirty DCF” prices the stock at 16.0 * [$7.95 – ($1.56 + $1.00)] = $86.24, which suggests it to be 3.9% undervalued.

TTC is a BUY under $78. With a forecast high price of $120.50, TAR should meet my 15% criterion closer to $60/share.