ProKASRO Acquisition And Autonomous Mowers Will Strengthen Market Position

Key Takeaways

• Toro's focus on innovation and strategic acquisitions aims to boost competitive position, capture market opportunities, and support revenue and profitability growth.
  
• Efforts in zero-turn mowers and share repurchases reflect confidence in market recovery and future performance, potentially enhancing brand leadership and investor value.
  
• Trade tensions, supply challenges, divestitures, and economic caution are impacting Toro's costs, margins, and sales growth.

Catalysts

Designs, manufactures, markets, and sells professional turf maintenance equipment and services.

• Toro is prioritizing innovation to address customer needs and align with market growth trends, which should support revenue growth. The introduction of cutting-edge products, such as autonomous mowers and smart connected solutions, aims to improve productivity and resource efficiency, enhancing Toro's competitive position and potentially boosting sales and profitability.
  
• The acquisition of ProKASRO Services USA strengthens Toro's position in the underground construction market, providing strategic portfolio expansion opportunities. This acquisition is expected to capture early market adoption in the fast-growing trenchless solutions space, potentially boosting revenue from increased market share and entry into new markets.
  
• Toro's AMP initiative is expected to deliver $100 million of annualized run rate savings by fiscal 2027. These savings from productivity improvements, expense management, and restructuring are expected to enhance net margins and profitability, which could positively impact earnings.
  
• Toro is leveraging significant investments in the zero-turn mower market, preparing for market normalization and rebound in demand. This is set to capitalize on previous share gains and strengthen brand leadership, which would drive revenue growth as market conditions improve.
  
• Strategic share repurchases, including $100 million in the first quarter of fiscal 2025, demonstrate confidence in future financial performance and aim to enhance earnings per share (EPS) through reduced share count, benefiting investors and potentially supporting stock valuation.

Toro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toro's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 10.5% in 3 years time.
• Analysts expect earnings to reach $511.1 million (and earnings per share of $5.09) by about March 2028, up from $406.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from 18.0x today. This future PE is lower than the current PE for the US Machinery industry at 22.1x.
• Analysts expect the number of shares outstanding to decline by 4.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Toro Future Earnings Per Share Growth

Risks

• Exposure to potential future incremental tariffs and retaliatory measures, particularly concerning China and North American trade, could affect costs and impact net margins.
  
• Elevated dealer field inventories, especially for snow and certain Pro landscape contractor products, suggest existing supply challenges, which could delay new sales and impact revenue.
  
• The divestiture of Pope Products contributed to a decrease in net sales compared to the previous year, which has had a negative impact on overall revenue figures.
  
• Fluctuations in raw material costs, coupled with high manufacturing and freight expenses, have put pressure on gross margins, affecting earnings stability.
  
• Macroeconomic caution in markets tied to homeowners and a decrease in market strength in some areas could slow sales growth and impact earnings expectations.

Valuation

• The analysts have a consensus price target of $92.4 for Toro based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.9 billion, earnings will come to $511.1 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $73.25, the analyst price target of $92.4 is 20.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.