Over the last six months, The Toro Company’s shares have sunk to $76.74, producing a disappointing 8.4% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is now the time to buy The Toro Company, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think The Toro Company Will Underperform?
Despite the more favorable entry price, we don't have much confidence in The Toro Company. Here are three reasons why TTC doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, The Toro Company grew its sales at a mediocre 6.7% compounded annual growth rate. This was below our standard for the industrials sector. 
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, The Toro Company’s margin dropped by 5.5 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 11.1%.
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. After the recent drawdown, the stock trades at 17.2× forward P/E (or $76.74 per share). At this valuation, there’s a lot of good news priced in - we think there are better investment opportunities out there. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of The Toro Company
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