Argh. Another company that blabbers about "record earnings." Although I've spoken fairly favorably on Toro (NYSE:TTC) in the past, it irks me to hear management talking about record earnings as if they mean something.
"Record" or not, third-quarter results were quite mediocre. Total revenues were up about 3%, and net income was flat for the quarter. Given that the year-ago results didn't include the benefits of the February acquisition of the Hayter company, I wonder whether there was any real growth at all this quarter, or whether organic sales actually declined.
That leads me to another point of aggravation. In the second quarter, the company's press release openly discussed the impact of Hayter, a UK provider of mowing products, on overall sales growth. Yet it did not do so this quarter, even though it had previously pegged Hayter as a meaningful source of growth in its residential business. Was this just a simple oversight, or was the company trying to mask poor underlying organic growth performance? I just don't know.
As you might imagine, Toro once again blamed the weather for its woes. That's at least three quarters in a row, if you're following at home. This time, it was the hot and dry summer weather that did the damage. That's an entirely legitimate issue -- Deere (NYSE:DE) reported weather-related troubles as well -- but at some point, management has to work around those problems.
Last but not least, the company continues to spend money on its share buyback program. Unfortunately, the $125 million or so that the company has spent in the past three quarters outstrips the $43.6 million in free cash flow that the company has produced. As a result, the company has taken on short-term debt to continue funding its repurchase program.
Now, I'm all for stock buybacks, but I think they need to be treated like desserts -- you have them once the meat and vegetables are taken care of. In this case, it would seem that Toro's appetite for repurchases has exceeded its capacity to self-fund that decision. I think the company should cut back its activity to a level that doesn't require further debt financing, at least.
As you might imagine, I'm no longer so favorably inclined toward Toro shares. Sales growth is weak (and has been guided lower for the year), debt is on the rise, and here we are talking about "record earnings." I can't deny that Toro has been a great stock over the past five years, but with a transition in management and questionable deployment of capital, I'm no longer so sanguine about the next five years.
More Foolish clippings on the yard-tool business:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
