The Toro Company (TTC)

Outdoor equipment company Toro (NYSE:TTC) fell short of the market’s revenue expectations in Q4 CY2024, with sales flat year on year at $995 million. Its non-GAAP profit of $0.65 per share was 3.6% above analysts’ consensus estimates.

Company Overview

Ceasing all production to support the war effort during World War II, Toro (NYSE:TTC) offers outdoor equipment for residential, commercial, and agricultural use.

Agricultural machinery companies are investing to develop and produce more precise machinery, automated systems, and connected equipment that collects analyzable data to help farmers and other customers improve yields and increase efficiency. On the other hand, agriculture is seasonal and natural disasters or bad weather can impact the entire industry. Additionally, macroeconomic factors such as commodity prices or changes in interest rates–which dictate the willingness of these companies or their customers to invest–can impact demand for agricultural machinery.

Competitors offering similar products include Deere (NYSE:DE), Alamo (NYSE:ALG), and Lindsay (NYS:LNN).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, The Toro Company grew its sales at a mediocre 6.7% compounded annual growth rate. This was below our standard for the industrials sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. The Toro Company’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 1.6% annually.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Professional and Residential , which are 77.3% and 22.2% of revenue. Over the last two years, The Toro Company’s Professional revenue (sales to contractors) was flat while its Residential revenue (sales to homeowners) averaged 2.4% year-on-year declines.

This quarter, The Toro Company missed Wall Street’s estimates and reported a rather uninspiring 0.7% year-on-year revenue decline, generating $995 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 1.9% over the next 12 months. While this projection implies its newer products and services will catalyze better top-line performance, it is still below the sector average.

The Toro Company’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 34% gross margin over the last five years. That means for every $100 in revenue, roughly $34.00 was left to spend on selling, marketing, R&D, and general administrative overhead.

The Toro Company produced a 33.7% gross profit margin in Q4, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

The Toro Company has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 11.6%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Looking at the trend in its profitability, The Toro Company’s operating margin decreased by 2.3 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.

In Q4, The Toro Company generated an operating profit margin of 7.8%, down 1 percentage points year on year. Since The Toro Company’s operating margin decreased more than its gross margin, we can assume it was recently less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

The Toro Company’s unimpressive 6.1% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

The Toro Company’s two-year annual EPS declines of 3.9% were bad and lower than its two-year revenue performance.

In Q4, The Toro Company reported EPS at $0.65, up from $0.64 in the same quarter last year. This print beat analysts’ estimates by 3.6%. Over the next 12 months, Wall Street expects The Toro Company’s full-year EPS of $4.18 to grow 6.6%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

The Toro Company has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 7.8% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that The Toro Company’s margin dropped by 5.5 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal higher capital intensity and investment needs.

The Toro Company burned through $67.7 million of cash in Q4, equivalent to a negative 6.8% margin. The company’s cash burn slowed from $111.3 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although The Toro Company hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 20.6%, splendid for an industrials business.

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. Unfortunately, The Toro Company’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

The Toro Company reported $171.3 million of cash and $1.22 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $671.9 million of EBITDA over the last 12 months, we view The Toro Company’s 1.6× net-debt-to-EBITDA ratio as safe. We also see its $60.7 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see The Toro Company beat analysts’ EPS expectations this quarter. On the other hand, its EBITDA missed significantly and its revenue fell slightly short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 1.4% to $77 immediately after reporting.

Updated: May 22, 2025 at 11:22 PM EDT

Are you wondering whether to buy The Toro Company or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

The Toro Company falls short of our quality standards. For starters, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its cash profitability fell over the last five years.

The Toro Company’s P/E ratio based on the next 12 months is 16.8x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $91.20 on the company (compared to the current share price of $74.97).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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