Robust Demand Drives The Toro Company To Record Revenue
The Toro Company (NYSE: TTC) has been one of the stronger pandemic plays and yet gets no love from the analysts. The company just reported another blowout quarter and one that keeps it on track for another record-setting year and yet the analyst just don't care. Pricetargets.com analyst tracking tools show the three analysts that are rating the stock only see it as a hold and we think that is a big mistake. Not only are there tailwinds blowing through the residential segment of business but also on the Professional end and seasonal factors are in play as well. The company is seeing robust demand for its winter products as well as for its lawn care products which we see as a reason to believe the company will outperform its newly updated guidance for the fiscal fourth quarter.
The Toro Company Beat Consensus And Guides Higher
The Toro Company had a great fiscal third quarter with robust demand seen across all operating segments and product lines. The company reported $976.80 million in consolidated revenue for a gain of 16.1% over last year. Last year's third quarter was impacted by the pandemic which makes the comparison fairly easy. That said, the Toro Company's Q3 revenue was flat on a YoY basis in the calendar 2020 time frame which leaves revenue up 16% in the two-year stack. Revenue was also better than consensus by 230 basis points, not a stunning beat but still evidence of underlying strength. On a segment basis, the Professional segment saw double-digit growth for the second quarter in a row at 15.2% but was outpaced by a 23% gain on the Residential side.
The only bad news within the report is the margin. The company reports a 110 basis point contraction in gross margin due to rising material and freight costs. Those costs were offset by internal efforts as well as cost leverage and revenue strength so may have been worse. On the bottom line, despite the contraction in margins, the company reported strong GAAP and adjusted earnings. On a GAAP basis, the $0.89 in EPS beat by $0.12 while the adjusted $0.92 is up 12% from last year and beat the consensus by $0.13. It is worth noting, the analysts were expecting a larger decline in margins and for earnings to be flat relative to last year.
Looking forward, the company is expecting sales strength to continue into the fiscal fourth quarter and it is guiding revenue higher. The Toro Company is now expecting full-year revenue growth in the range of 17% compared to the 12% to 15% previously guided and the 13.82 % expected by the analyst. The bad news, again, is with the margin. The company is expecting margin pressure to continue but also increased guidance for earnings. The company is now expecting EPS in the range of $3.53 to $3.57 compared to the analyst consensus of $3.57. In our view, there is upside risk in the earnings guidance for two reasons. The first is that the Toro Company is working to mitigate supply chain issues and control margin. The second is that price increases are expected(by us) as well.
The Toro Company Dividend Is Strong As An Ox
The Toro Company is not a high-yielding dividend payer but it is a very strong dividend payer. The stock is only yielding about 1% at current prices but it's backed up by a fortress balance sheet, record-setting revenue and earnings, and ample free cash flow. The company has also been increasing the distribution for the past eight years and we expect to see that extended to the 9th year at the end of the fiscal year. Based on the low 30% payout ratio and other metrics we see a possibility for a double-digit increase.
The Technical Outlook: The Toro Company Sits On Support
The market for shares of The Toro Company was not impressed with the Q3 results despite their strength. Price action is retreating in the wake of the report but has, so far, failed to break through significant support levels. Assuming that support near the $108 level will hold, we see the stock extending the sideways trend and then moving higher later in the year.
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