TTC Stock Study (2-22-23)

I recently did a stock study on The Toro Co. (TTC) with a closing price of $111.22.

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… The company
     > also produces snow plowers and ice management products.

This medium-sized company has grown sales and earnings at annualized rates of 8.8% and 13%, respectively, over the last 10 years. Lines are mostly up, straight, and parallel without a single YOY decline. Over the last decade, PTPM has been stable ranging from 10.3% in ’19 to 14.2% in ’18 with a last-5-year average of 12.3%. This is roughly even with peer averages while leading industry averages.

ROE has trended slightly lower over the last decade going from 39.3% in ’13 to 34% in ’22 with a last-5-year average of 33.9%. This is dramatically better than peer and industry averages. Debt-to-Capital has been consistent with a last-5-year average of 40.9%. This is slightly higher than peer and industry averages. Interest Coverage is 16, which is reassuring, while Quick Ratio is a lukewarm 0.49. Value Line rates the company B++ for Financial Strength.

I forecast long-term annualized sales growth of 7% based on the following:

• CNN Business projects 11.1% YOY and 8.5% per year for ’23 and ’22-’24, respectively (based on 3 analysts).
• YF projects YOY growth of 10.2% and 7.1% for ’23 and ’24, respectively (4 analysts).
• Zacks projects YOY 11.1% and 8.4% for ’23 and ’24, respectively (1).
• Value Line projects 7.4% annualized from ’22-’26.
• CFRA projects 7.4% YOY and 7.4% per year for ’23 and ’22-’24, respectively.

I’m forecasting near the bottom of the range.

I forecast long-term annualized EPS growth of 8% based on the following:

• CNN Business projects 16.9% YOY and 15.6% per year for ’23 and ’22-’24, respectively (based on 3 analysts), along with 5-year annualized growth of 10.2%.
• MarketWatch projects 16% and 15% per year for ’22-’24 and ’22-’25, respectively (5 analysts).
• Nasdaq.com projects 14.9% and 14.1% per year for ’23-’25 and ’23-’26, respectively (1).
• YF projects YOY 16.9% and 14.3% for ’23 and ’24, respectively (5), along with 5-year annualized growth of 10.2%.
• Zacks projects YOY 17.9% and 15.2% for ’23 and ’24, respectively (1).
• Value Line projects annualized growth of 9.3% from ’22-’26.
• CFRA projects 14.8% YOY and 13.2% growth per year for ’23 and ’22-’24, respectively.

I am projecting below the average [of three] long-term estimate[s] (9.9%).

My Forecast High P/E is 21. Over the last 10 years, high P/E has ranged from 21.4 (’15) to 31.3 (’21) with a last-5-year average of 28.8. I expect this to cool down at some point.

My Forecast Low P/E is 15. Over the last 10 years, low P/E has ranged from 15.4 (’13) to 21.7 (’21) with a last-5-year average of 19.7. I expect this to fall as time goes on.

My Low Stock Price Forecast is the default value of $63.10. This is 43.2% below the previous closing price and 12.2% below the 52-week low.

The lowest Payout Ratio in the last 10 years was 21.4% (’13) and the last-5-year average is 31.4%. I am forecasting 26%, which is lower than nine of the 10 years.

These inputs land TTC in the HOLD zone with an U/D ratio of 0.9. The Total Annualized Return (TAR) is 7.2%.

With TAR being lower than I seek for a medium-sized company, the more-conservative PAR (using Forecast average, not High, P/E) will certainly be too low. It currently sits at 2.8%. A good margin of safety (MOS) will give me more confidence in this stock study even though it may not convince me to invest right now.

Member Sentiment (MS) reveals that out of [only] 37 studies over the past 90 days (my own excluded), projected sales, projected EPS, Forecast High P/E, Forecast Low P/E, and Payout Ratio average 7.7%, 9.3%, 27.4, 19, and 30.5%, respectively. My inputs are all lower. My P/E range is significantly lower (mean 18.0 versus 23.2) although Value Line projects the same average annual P/E that I do.

MS has an average Low Stock Price Forecast of 72.6, which is 15% above mine. This would improve my U/D ratio, but I feel comfortable with the P/E range selected.

All in all, I appear to have at least a small margin of safety built into this study. I would look to re-evaluate (with a focus on PAR) the stock on a cross below $85/share.