3 Reasons to Avoid TTC and 1 Stock to Buy Instead

Over the past six months, The Toro Company’s stock price fell to $72.98. Shareholders have lost 12.5% of their capital, which is disappointing considering the S&P 500 has climbed by 4.5%. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in The Toro Company, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think The Toro Company Will Underperform?

Even though the stock has become cheaper, we're swiping left on The Toro Company for now. Here are three reasons why there are better opportunities than TTC and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, The Toro Company’s 6.8% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, The Toro Company’s margin dropped by 9.1 percentage points over the last five years. 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 increasing investment needs and capital intensity. The Toro Company’s free cash flow margin for the trailing 12 months was 10%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

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.

Final Judgment

The Toro Company falls short of our quality standards. Following the recent decline, the stock trades at 15.9× forward P/E (or $72.98 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. Let us point you toward the most dominant software business in the world.

Stocks We Would Buy Instead of The Toro Company

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