3 Reasons Toro is Going for the Green

Margins

Fiscal 2011 was the first year in Toro's four-year plan to take the company into its second century as a more efficient, well-run business. Operating earnings is one of the areas where it feels progress is possible. Toro intends to deliver operating margins of 12% by the end of fiscal 2014. Dubbed "Destination 2014" by senior management, it lies 220 basis points from its audacious goal with three fiscal years left in which to accomplish the task. Is it doable? I don't see why not. In the past three fiscal years, its operating margin has risen from 7.6% in 2009 to 9.8% in 2011. That's a 220 basis point improvement in just two years, at a time when the economy was anything but solid.

Furthermore, Toro's best year in terms of operating margins is fiscal 2007, when its operating margin was 11.9%, exactly the same as its stated 2014 goal. In 2007, its professional segment, which provides products and services to turf professionals including golf course superintendents, produced operating margins of 20%. In 2011, those same margins were 350 basis points lower. When you consider that its professional segment accounts for 66% of revenue, coming anywhere close by 2014 would make a big difference to the bottom line. On the residential side, all it has to do is hold the line on revenues and margins and its stock will be more than ready to take off.

Revenues

Toro's second main goal under Destination 2014 is to increase organic sale by $100 million in four consecutive years, beginning with 2011 and ending in 2014. Excluding incremental acquisition revenue of $19 million in 2011, its organic revenue grew $175 million year-over-year, which is an increase of 10.3%. A 10% increase in each of the next three years (not including revenue from acquisitions), combined with a 12% operating margin, translates into a 2014 earnings estimate of $5.75 a share and a forward P/E of 11.2. If it were to hit $5.75 in earnings per share, its profits would be 69% higher than in 2007, its most profitable year on record.

Acquisitions

The funny thing about golf courses is that the putting greens need to be rolled on a frequent basis; perhaps not daily, but several times a week, especially in the summer. In December, Toro acquired a line of green rollers from Graden USA for an undisclosed amount. Darren Redetzke, Vice President of its commercial business, stated, "This acquisition fills an important product gap in our core golf business and helps further strengthen our offering in the greens care category." That's a big understatement. Go to their website and you'll see that it offers pretty much every type of mower a golf course superintendent needs to get the job done, except rollers for the putting surface.

Toro already has a strong brand in the golf business and this will complete the package. It's not easy operating golf courses these days and if you don't have a well maintained track, you can forget charging the big bucks, whether we're talking public or private golf clubs. This acquisition likely wasn't expensive, yet it should make the selling process a little easier.
 
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