Toro: Like Watching Grass Grow

Core Viewpoint - Toro Company continues to face challenges in consumer demand for lawn care and landscaping equipment, resulting in stock price fluctuations within the $80-$100 range since Q3 2023 earnings report [2][3][18] Financial Performance - In Q3 2024, Toro reported adjusted EPS of $1.18, an improvement from $0.95 a year ago, but below the management's expectations of surpassing the previous record of $1.19 [4] - Full-year guidance for FY 2024 has been revised down, with expected sales growth of only 1% and EPS projected in the range of $4.15-$4.20, down from last year's $4.21 [4][15] - The residential segment showed strong performance with a 52.6% increase in sales and an operating margin of 12.2% [4] Market Dynamics - The professional segment, which constitutes about 75% of Toro's sales, experienced a slight year-on-year decline, although not as severe as previous quarters [5] - There is a backlog of orders in the golf and grounds and underground construction markets, but overall growth remains sluggish [5][6] Inventory Management - Toro is making progress in reducing high dealer inventories, with days sales outstanding (DSO) improving from 200 days to 119 days in Q3 2024 [7][8] - The company is approximately 80% of the way back to normal inventory levels, indicating a positive trend in inventory management [8][12] Capital Management - Toro's free cash flow (FCF) conversion is improving, currently at 82% of net income, with expectations of achieving at least 100% FCF conversion for the full year [13][15] - The company has paid off $40 million in debt, repurchased $109 million in stock, and paid $113 million in dividends so far this year [15] Valuation - Toro's stock is currently trading at a PE ratio of 19.6 times 2024 earnings, which is near the bottom of its 10-year historical range [16] - Given the slowdown in growth and reduced guidance, a PE of 20 appears fair, with a price target of $83.50 based on the midpoint of company guidance [17]