Winter in the South is a glorious thing. There really isn't enough snow to justify buying a shovel, let alone a snowblower, and winter provides a welcome respite from the necessity to mow those domesticated weeds we call "grass." Nevertheless, as the weather warms up, people's thoughts will turn to spring landscaping and the need to bring out the Toro (NYSE: TTC) lawnmower once again.
Although results for the first quarter were hurt a bit by an unusually warm and dry winter (hurting demand for snow throwers), sales still grew more than 10% to almost $347 million. Continuing the company's past history of strong expense and operating management, earnings grew faster than sales and came in up 20% over last year.
As I just mentioned, a warm winter in many parts of the country dinged sales in the residential business. Sales of residential products were down 2% in the quarter and earnings were down almost 47%.
Although most people no doubt think of Toro in terms of its residential lawnmowers and assorted gear, the real story at Toro is the commercial business. This business grew more than 18%, and earnings were up more than double that rate. Looking ahead, the commercial business will almost certainly be the key to Toro's ongoing growth.
Toro's commercial business is already considerably larger than the residential business, and the overall market itself looks to be worth more than $3 billion a year (and growing). While there are worthy competitors such as Deere (NYSE: DE) also competing for business, Toro has more than held its own so far.
Of course, there are challenges ahead for Toro investors. The company is in the midst of a management transition, and given the stellar results achieved under the prior CEO, the new man will certainly have large shoes to fill. That said, new CEO Michael Hoffman has been with the company for some time, and investors shouldn't worry too much about Toro's ongoing management.
After a great run, the stock is starting to look a little pricey. Trading at nearly 21 times trailing earnings and 14 times trailing EV-to-FCF, the stock looks a little expensive relative to future expectations of low-teens growth. What's more, if you strip out one aberrant year (1998), the current P/E is the highest it's been in more than 10 years' time.
That said, quality companies often look more expensive than they should, and with solid growth opportunities and solid returns on assets and shareholder equity, there is no doubt that Toro merits the title of "quality company."
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
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