Bud Labitan's  Instablog

5/31/2010
 
The Toro Company (Toro) designs, manufactures, and markets professional turf maintenance equipment and services, turf and agricultural micro-irrigation systems, landscaping equipment, and residential yard and snow removal products. The Company operates in three segments: professional, residential and distribution. Its products are advertised and sold at the retail level under the trademarks of Toro, Exmark, Irritrol, Hayter, Pope, Lawn-Boy and Lawn Genie. During the fiscal year ended October 31, 2009 (fiscal 2009), the segments professional, residential and distribution accounted for 63%, 35% and 2%, respectively, of the Company's net sales. During fiscal 2009, the Company acquired certain assets of Ty-Crop Manufacturing Ltd., a manufacturer of topdressing and material handling equipment for golf course and sports fields applications.
 
52 Week High 58.50
52 Week Low 28.43

Does TTC make for an intelligent investment or intelligent speculation today?Starting with a base estimate of annual Free Cash Flow at a value of approximately $215,000,000 and the number of shares outstanding at 34,000,000 shares; we used an assumed FCF annual growth of 4 percent for the first 10 years and assume zero growth from years 11 to 15.  Review the Free Cash Flow record here:

http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=USA&Symbol=TTC

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $81.23.

  Market Price = $53.49
  Intrinsic Value = $81.23  (estimated)
  Debt/Equity ratio = .71
  Price To Value (P/V) ratio = .66  and the estimated bargain = 34. percent.

Before we make a purchase, we must decide ( filter #1 ) if TTC is a high quality business with good economics. Does TTC have ( filter #2 ) enduring competitive advantages, and does TTC have ( filter #3 ) honest and able management.

The current price/earnings ratio = 24.5
It 's current return on capital = 12.67
Using a debt to equity ratio of .71, TTC shows a 5-year average return on equity = 30.1

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Does TTC make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is TTC the best place to invest our money today?

TIME FORWARD PROJECTION:

How will TTC compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

In summary, using a debt to equity ratio of .71, TTC shows a 5-year average return on equity = 30.1 The estimated intrinsic value per share (discounted back to the present) is approximately $81.23. The Market Price = $53.49  and the Debt/Equity ratio = .71  The Price To Value (P/V) ratio = .66  and the estimated bargain = 34. percent.

Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?

There is a good discussion of risks that the company faces here: http://www.sec.gov/Archives/edgar/data/737758/000104746909010874/a2195867z10-k.htm

As always, I appreciate hearing your views,

Bud Labitan
Author of the new book 'Price To Value'
http://www.amazon.com/Price-Value-Bud-Labitan/dp/0557317185

Author of 'The Four Filters Invention of Warren Buffett and Charlie Munger'
http://www.amazon.com/dp/0615241298

Labitan Partners
budlabitan@ aol.com
www.frips.com