The Toro Co Stock Appears To Be Modestly Overvalued
- By GF Value
The stock of The Toro Co (NYSE:TTC, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $104.04 per share and the market cap of $11.2 billion, The Toro Co stock is estimated to be modestly overvalued. GF Value for The Toro Co is shown in the chart below.
Because The Toro Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 11.4% over the past five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. The Toro Co has a cash-to-debt ratio of 0.56, which ranks in the middle range of the companies in Industrial Products industry. Based on this, GuruFocus ranks The Toro Co's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of The Toro Co over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. The Toro Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $3.5 billion and earnings of $3.41 a share. Its operating margin is 13.68%, which ranks better than 81% of the companies in Industrial Products industry. Overall, the profitability of The Toro Co is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of The Toro Co over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of The Toro Co is 11.4%, which ranks better than 74% of the companies in Industrial Products industry. The 3-year average EBITDA growth is 7.8%, which ranks in the middle range of the companies in Industrial Products industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, The Toro Co's return on invested capital is 22.39, and its cost of capital is 6.05. The historical ROIC vs WACC comparison of The Toro Co is shown below:
In summary, the stock of The Toro Co (NYSE:TTC, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Industrial Products industry. To learn more about The Toro Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
