The Toro Company: Unearthing Opportunities in Outdoor Equipment.

The Toro Company is a leading provider of products and solutions for outdoor environments, supplying equipment used to maintain turf, manage water, remove snow, and support aging infrastructure. With grass continuing to grow, snow continuing to fall, and infrastructure steadily wearing out, demand for Toro’s products is supported by everyday needs rather than short-term trends. The company also benefits from regular product replacement, which creates a degree of recurring revenue and stability. Taken together, these factors make The Toro Company an interesting business to examine. The question remains: does The Toro Company deserve a place in an investment portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in The Toro Company at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of The Toro Company, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

The Toro Company is a diversified global manufacturer of equipment and solutions for the outdoor environment. Founded in 1914 and headquartered in Minnesota, Toro designs, manufactures, and sells a broad range of products used to maintain turf, manage water, construct and maintain underground infrastructure, and handle snow and ice. Its portfolio spans professional turf maintenance equipment, irrigation systems, landscaping tools, underground construction machinery, snow and ice management equipment, agricultural irrigation solutions, and residential yard and snow products. The company operates through two main segments. The Professional segment, which accounts for just over 80% of revenue, serves golf courses, sports fields, landscape contractors, municipalities, rental companies, and infrastructure contractors. This segment generates higher margins and benefits from more stable, recurring demand driven by maintenance cycles and infrastructure needs. The Residential segment focuses on homeowners and includes lawn mowers, snow throwers, and yard tools, making it more seasonal and consumer-driven. Toro sells its products in more than 125 countries through an extensive network of distributors, dealers, rental centers, mass retailers, home improvement stores, and selective direct sales to end-users such as municipalities. Its brand portfolio includes Toro, Exmark, Ditch Witch, BOSS, Spartan, Ventrac, Irritrol, Lawn-Boy, and several others, allowing the company to address a wide range of professional and consumer use cases. A defining feature of Toro’s business model is its exposure to essential, repeat-driven activities such as grass growth, irrigation needs, snow removal, and infrastructure maintenance. This creates predictable replacement demand and supports steady aftermarket revenue from parts, service, and extended warranties. The company complements this stability with ongoing investment in innovation, including autonomous turf equipment, smart irrigation systems, electrification, and connected software solutions. Toro’s competitive moat is built on a combination of brand strength, market leadership, distribution scale, and deep customer integration. Brand equity and market leadership are central to Toro’s position. With more than a century of operating history and a portfolio of over 17 established brands, the company holds number one or number two market share positions across many of its core categories. In several niches, such as golf course maintenance, Toro is uniquely positioned as the only major provider offering both turf equipment and irrigation systems, creating a compelling one-stop solution for customers. Its distribution and service network represents a significant barrier to entry. Toro’s long-standing relationships with distributors, dealers, rental companies, and major retail partners ensure broad product availability and high-quality after-sales support. For professional customers, access to fast parts replacement, trained service technicians, and local dealer expertise is often more important than marginal price differences, reinforcing customer loyalty and raising switching costs. Toro’s scale and operational capabilities also play an important role. Its global manufacturing footprint, vertical integration in key processes, and disciplined use of lean manufacturing enable cost control, flexibility, and consistent product quality. The company’s ability to invest heavily in R&D is supported by its cash-generative model, allowing it to stay ahead in areas such as automation, connectivity, and sustainable water management. Finally, diversification across end markets adds resilience. Toro is not dependent on any single customer or industry. Exposure to golf, municipal spending, landscaping, agriculture, construction, and residential consumers helps offset downturns in individual segments.

Management

Richard Olson serves as the CEO of The Toro Company, a role he has held since November 2016 after nearly three decades of progressive leadership within the organization. He joined Toro in 1986 as a manufacturing process engineer and built his career entirely inside the company, gaining deep operational, commercial, and international experience across multiple business cycles. Over the years, Richard Olson advanced through a series of increasingly senior roles, including General Manager of Exmark, Vice President of International Business, and later President and COO This long internal progression has given him an understanding of Toro’s manufacturing footprint, dealer driven distribution model, and end markets, particularly within professional turf, construction, and infrastructure equipment. His leadership approach reflects a strong operational grounding combined with a long term strategic perspective. Richard Olson holds a Bachelor of Science in Industrial Technology from Iowa State University and an MBA from the University of Minnesota Carlson School of Management. His educational background, combined with decades of hands on experience, has shaped a leadership style centered on operational discipline, continuous improvement, and customer focused innovation. Since becoming CEO, Richard Olson has overseen a significant expansion of The Toro Company’s product portfolio and market reach. Under his leadership, the company has strengthened its position in professional markets through acquisitions such as Charles Machine Works, the owner of Ditch Witch, Ventrac, and Intimidator Group. These transactions broadened Toro’s exposure to underground construction, specialty terrain equipment, and zero turn mowers for professional users, reinforcing the company’s emphasis on higher margin, less discretionary end markets. Innovation has been a central theme of Richard Olson’s tenure. He has pushed Toro to invest more heavily in autonomous equipment, connected fleet management, smart irrigation systems, and electrification. These initiatives address structural challenges faced by customers, including labor shortages, water efficiency requirements, and rising operating costs, while deepening customer reliance on Toro’s integrated equipment, software, and service ecosystem. Not all aspects of his tenure have been without scrutiny. A goodwill impairment of more than 150 million dollars related to the acquisition of Intimidator Group has raised questions about valuation discipline and acquisition timing. While such charges are not uncommon in industrial portfolios, they highlight the execution risks inherent in expanding through M&A, particularly in more cyclical end markets. Employee sentiment under Richard Olson’s leadership has generally been positive, though not uniform across platforms. On Comparably, his CEO rating of 66 out of 100 places him in the upper half of leaders at similarly sized companies. On Glassdoor, his approval rating is significantly higher at 96%, suggesting strong internal confidence in his leadership and strategic direction. Overall, Richard Olson’s nearly four decades at The Toro Company, combined with his operational expertise and long term strategic focus, position him as a steady and credible leader. His ability to balance innovation, disciplined capital allocation, and portfolio diversification has helped Toro remain a cash generative, market leading industrial company. As he continues to emphasize automation, sustainability, and professional segment growth, Richard Olson appears well positioned to guide The Toro Company through its next phase of growth.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. The Toro Company has been able to earn a high ROIC for many years because of how its business is structured and the types of customers it serves. A large part of Toro’s business is focused on professional users such as golf courses, municipalities, contractors, and infrastructure operators. These customers rely on Toro’s equipment to keep operating every day, which makes reliability, service, and long-term support more important than simply buying the cheapest machine. That creates strong customer loyalty and repeat purchases. Equipment also wears out over time, whether it is mowers, snow equipment, irrigation systems, or underground construction tools, which leads to regular replacement demand. This steady need for new equipment and parts helps Toro earn good returns on the money it invests. Toro also benefits from a dealer-based distribution model. Dealers handle sales, service, and customer relationships, which means Toro does not need to invest heavily in its own retail or service infrastructure. This keeps the business relatively efficient while still allowing it to reach customers globally. On top of that, the Professional segment, which now makes up roughly 80% of revenue, generally earns higher margins and more stable demand than the Residential segment. All of this explains why Toro was able to generate ROIC levels above 25% in the years leading up to 2019. Since fiscal 2019, ROIC has gradually declined from those very high levels to the mid-teens, and this has a few clear explanations. One major reason is acquisitions. Toro has made several large purchases to expand into new areas such as underground construction, specialty equipment, and professional zero-turn mowers. When a company makes acquisitions, a lot of capital is added upfront, while the benefits come in gradually over many years. This naturally pushes ROIC lower in the short to medium term, even if the underlying businesses are performing reasonably well. The impairment related to the Intimidator Group acquisition also weighed on returns and raised valid questions about how much was paid for that asset. At the same time, Toro has deliberately increased spending on innovation. Investments in autonomous equipment, smart irrigation, connected software, and electrification raise costs today but are meant to strengthen the company’s competitive position over the long run. These initiatives tend to reduce ROIC in the early years, before the products reach scale and begin to contribute more meaningfully to profits. There have also been external pressures. Higher input costs, supply chain disruptions, and labor inflation over the past several years have limited margin expansion. Residential demand has been more volatile since the pandemic boom faded, which has slightly diluted overall returns. None of these factors suggest that Toro’s core business has weakened, but together they explain why ROIC has drifted down from above 30% to around 16% to 18%. Whether this is a concern depends on perspective. Even at today’s levels, Toro is still earning returns well above what it costs the company to invest in its business. That means it is still creating value, just not at the exceptional levels seen a decade ago. What would be more worrying is a continued slide toward low double-digit returns without clear benefits from past investments. Looking ahead, there are reasons to believe ROIC can stabilize and potentially improve. The pace of large acquisitions should slow, while the earnings contribution from past deals continues to build. The Professional segment continues to grow as a share of revenue, which supports stronger and more consistent profitability. New technologies such as autonomous equipment and smart irrigation should gradually improve pricing power and efficiency as adoption increases. Management has also reiterated that it is taking a disciplined approach to capital deployment and remains focused on profitable growth rather than growth for its own sake.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. The Toro Company has been able to grow its equity almost every year for more than a decade because the business has consistently generated profits and reinvested a meaningful portion of those profits back into the company in productive ways. Strong cash generation from professional customers, recurring replacement demand, and disciplined operations allowed equity to compound steadily from 2016 through 2024. Another important driver has been Toro’s long-term focus on higher-quality growth. The Professional segment has grown to represent the majority of revenue and earnings, providing more stable profitability than the Residential segment. This stability has supported steady earnings accumulation over time, which naturally increases equity. In addition, acquisitions such as Charles Machine Works and Ventrac expanded the business into adjacent markets and added to equity over multiple years as those businesses were integrated and began contributing to results. The decline in equity in fiscal year 2025 stands out because it breaks a long-running trend, but it does not automatically point to a deterioration in the underlying business. A decline in equity can occur for several reasons, and not all of them reflect weaker operations. In Toro’s case, the most likely explanation is a combination of factors rather than a single event. First, earnings growth slowed compared to earlier years, which reduced how much equity could be added through retained profits. Softer demand in some end markets and ongoing cost pressures limited incremental equity growth relative to the strong years that followed the pandemic. Second, Toro continues to invest heavily in long-term initiatives such as automation, connected equipment, and smart irrigation. While these investments are strategically important, they tend to weigh on near-term profitability and slow equity accumulation before their benefits are fully realized. Looking ahead, equity is still expected to grow over time as long as Toro remains profitable and disciplined in its investment decisions. The Professional segment continues to provide a stable earnings base, and as recent investments mature, retained earnings should once again contribute positively to equity. The most reasonable expectation is not a straight line upward every year, but a return to gradual equity growth over a full business cycle rather than continued decline.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. The Toro Company has managed to generate high free cash flow in most years because of how its business converts earnings into cash and because its end markets require ongoing, predictable spending rather than large one-off projects. A key reason is the nature of Toro’s customers and products. Much of the business serves professional users such as golf courses, municipalities, contractors, and infrastructure operators. These customers replace equipment regularly due to wear and tear and rely on Toro for parts, service, and upgrades. This creates steady cash inflows and limits the risk of sudden drops in demand. At the same time, Toro’s dealer-based distribution model keeps its own capital needs relatively low, allowing a larger share of profits to turn into cash rather than being tied up in buildings, retail networks, or service fleets. Toro has also been disciplined with spending. Manufacturing is flexible, inventories are actively managed, and investment in new capacity is generally incremental rather than aggressive. This means that even when earnings fluctuate, cash generation often remains strong. Over time, this combination has allowed Toro to consistently generate meaningful free cash flow across different economic environments. The record free cash flow in fiscal year 2025 was mainly the result of how cash flowed through the business rather than a sharp increase in sales. Over the year, Toro reduced inventory levels that had been built up in earlier periods and collected cash more efficiently from customers, while managing payments to suppliers more tightly. As supply chains became more stable, less cash was tied up in day-to-day operations, and more cash was freed up. This release of cash had a large, mostly one-time impact and explains why free cash flow jumped sharply even though revenue growth was relatively modest. Management pointed out that this led to an unusually high cash conversion rate, meaning Toro turned a much larger share of its profits into cash than is typical in a normal year. Looking ahead, it is unlikely that free cash flow will continue to grow at the same pace every year from this level. A large part of the boost in 2025 came from temporary factors that freed up cash inside the business and are unlikely to repeat to the same extent. That said, Toro’s management has stated that cash generation should remain strong, with expectations that the company will again turn more than its annual profits into cash in fiscal year 2026. As for how Toro uses its free cash flow, the priorities are clear. A large portion is returned to shareholders through regular dividends and share repurchases, reflecting management’s confidence in the stability of the business. Beyond that, cash is used to fund ongoing investments in innovation, automation, smart irrigation, and electrification, as well as selective acquisitions that expand the product portfolio or strengthen the Professional segment. Debt reduction and balance sheet flexibility also remain part of the equation, particularly after larger acquisitions. The free cash flow yield is at its highest level in more than a decade, which suggests the shares may be trading at an attractive valuation. However, valuation will be revisited later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. This can be assessed by dividing total long-term debt by earnings. After performing the calculation for The Toro Company, I found that the company has 2,97 years of earnings in debt. This is below the three-year threshold, which indicates that debt is not a concern if I were to invest in The Toro Company. The company has only had one year in the past decade where its debt-to-earnings ratio exceeded the three-year threshold, and this was primarily due to the acquisition of The Intimidator Group. This suggests that The Toro Company generally maintains a disciplined approach to debt management.

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Risks

Macroeconomic factors is a risk for the Toro Company because a meaningful part of its demand is closely tied to economic confidence, spending capacity, and investment cycles across both professional customers and consumers. For the Professional segment, economic slowdowns can directly affect spending by municipalities, golf courses, contractors, and infrastructure operators. When budgets are tightened, large purchases such as turf equipment, irrigation systems, or construction machinery are often delayed rather than canceled outright. Golf courses may postpone renovations or reduce maintenance investments, municipalities may defer infrastructure upgrades, and contractors may scale back fleet renewals if project pipelines weaken. Because these customers represent a large share of Toro’s revenue, even modest delays in purchasing decisions can pressure sales and earnings in weaker economic environments. The Residential segment is even more sensitive to macro conditions. Demand for lawn mowers, snow throwers, and yard tools is influenced by consumer confidence, interest rates, and housing activity. Higher interest rates and inflation reduce discretionary spending and make homeowners more cautious, especially after the unusually strong demand cycle that followed the early stages of COVID. Management has described this period as an extraordinary cycle, with demand peaking and then crossing a midpoint around mid-2023. Since then, the residential business has been in recovery, but the pace of that recovery depends heavily on consumer sentiment, the broader economic environment, and borrowing costs. As a result, expectations for residential demand remain deliberately muted. Macroeconomic conditions can also affect Toro through public sector spending. Reduced government or municipal budgets can slow spending on parks, sports fields, snow management equipment, and irrigation systems. In addition, lower infrastructure spending can impact Toro’s underground construction and rental equipment businesses, which rely on consistent investment in utilities, broadband, and public works.

Weather conditions is a risk for The Toro Company because demand for many of its products is directly linked to seasonal and regional weather patterns that the company cannot control. Changes in weather do not just influence when customers buy equipment, but whether they buy it at all. A clear example is snowfall. Demand for snow throwers, snowplows, and professional snow and ice management equipment depends heavily on winter conditions. When snowfall in key regions is well below average, customers simply need less equipment. Recent winters with unusually low snowfall have led to weaker sales of Toro’s higher-margin snow products and elevated inventory levels at dealers. If low snowfall persists for multiple seasons, it can materially pressure both revenue and profitability, particularly in the Professional segment where snow equipment carries attractive margins. Weather also affects turf maintenance and irrigation demand. Extended droughts can reduce mowing frequency and discourage purchases of new mowing equipment, while severe droughts combined with watering restrictions can sharply reduce demand for irrigation products. On the other end of the spectrum, unusually wet or rainy conditions can delay landscaping projects, turf maintenance, and golf course renovations, pushing purchases into later periods or canceling them altogether. In both cases, weather disrupts normal buying patterns rather than eliminating demand permanently, but the timing impact can still hurt reported results. An additional challenge is the knock-on effect across seasons. Poor weather in one season can weaken demand in the next. For example, landscape contractors who experience a weak winter due to low snowfall may generate less income and become more cautious with spending in spring, delaying purchases of mowing and turf equipment. This creates a ripple effect that can affect multiple product categories across the year. Climate change increases this risk. More frequent and unpredictable extreme weather events such as droughts, floods, storms, heatwaves, and unusually warm winters add volatility to Toro’s end markets. These conditions make it harder for dealers and customers to plan inventory and capital spending, increasing the risk of demand swings. Over time, warmer winters could structurally reduce snow equipment demand in some regions.

Supply chain risk is a key risk for The Toro Company because its operations depend on a complex network of suppliers, materials, and logistics that are exposed to disruption, cost volatility, and trade policy uncertainty. Toro sources a wide range of components and materials, including steel, aluminum, engines, hydraulics, and electrification components. While many of these inputs are available from multiple suppliers, some are sourced from a limited number of vendors. When suppliers face capacity constraints, labor shortages, financial stress, natural disasters, or geopolitical disruptions, Toro can experience delays in production, reduced product availability, or higher input costs. Trade policy adds another layer of uncertainty. Tariffs have affected Toro since 2018, and management has indicated that tariff exposure is expected to rise meaningfully in fiscal year 2026, driven primarily by steel and aluminum duties as well as China-related tariffs. Although Toro has proactively reduced its exposure to China and offset a large portion of tariff costs through productivity improvements and selective price increases, future tariffs remain unpredictable and may not be fully absorbed without impacting margins or demand. Cost inflation across the supply chain is also a risk. Higher prices for raw materials, transportation, and freight can pressure profitability if Toro is unable to pass those costs on to customers. This risk is particularly relevant in the Residential segment, where customers are more price sensitive and demand has already been under pressure. Supply chain disruptions can also affect timing. Toro’s products are highly seasonal, and delays in components or finished goods can lead to missed selling windows. If products are not available when customers need them, demand may be delayed or lost altogether, even if underlying demand remains intact. Finally, supply chains are increasingly exposed to broader systemic risks such as extreme weather events, pandemics, and geopolitical tensions. These events can disrupt suppliers, logistics routes, and manufacturing operations at the same time, amplifying their impact and making recovery more difficult.

Reasons to invest

Innovation is a reason to invest in the Toro Company because it strengthens customer value, reinforces competitive advantages, and supports long-term profitable growth across both the Professional and Residential segments. The Toro Company has consistently focused on developing products that solve real problems for its customers rather than innovation for its own sake. Many of Toro’s customers, particularly golf courses, municipalities, and landscape contractors, are facing structural challenges such as labor shortages, rising costs, and tighter budgets. Toro’s innovation strategy is designed to improve productivity, reduce operating complexity, and lower total cost of ownership, which makes its products more essential rather than discretionary. A clear example is Toro’s progress in autonomous and connected equipment. Products such as the Autonomous GeoLink Fairway Mower have been met with strong customer feedback, especially from golf course operators who struggle to find and retain skilled labor. Autonomous mowing allows customers to maintain course quality with fewer personnel and more predictable operating costs. These benefits directly translate into customer savings and efficiency gains, which support adoption and pricing power over time. Toro is also innovating by expanding the versatility of its equipment. The Toro GrandStand Multi Force stand-on mower, which supports attachments such as plows, power brooms, and bagging systems, allows customers to use a single machine across multiple seasons. This increases asset utilization and productivity for contractors, making Toro’s equipment more valuable and harder to replace with competing products. In the professional landscaping space, innovations such as the Exmark Radius zero-turn mower bring high-end features and styling from premium models into a broader customer base. By offering professional-grade performance at more accessible price points, Toro expands its addressable market while maintaining strong brand consistency across its portfolio. Software and data-driven solutions are becoming an increasingly important part of Toro’s innovation engine. The company is investing in smart irrigation platforms and software-as-a-service products that help customers manage water more efficiently. Tools such as the Lynx Drive Central Control System allow golf course superintendents to monitor and control irrigation in real time from mobile devices, improving responsiveness and reducing waste. Toro’s AI-enabled spatial adjust software further enhances this capability by integrating with soil moisture sensors to automatically recommend optimal watering levels. Early customer feedback highlights improved turf quality, better playing conditions, and more consistent results, reinforcing the value of these digital solutions.

Secular trends is a reason to invest in the Toro Company because several of its largest professional end markets are supported by long-lasting, structural growth drivers rather than short-term economic cycles. The Toro Company is deliberately focusing investment on markets such as golf, grounds maintenance, and underground construction, where demand is being driven by multi-year trends that are expected to persist regardless of near-term macro conditions. These markets align closely with Toro’s strengths in professional equipment, irrigation, and infrastructure solutions. One of the clearest secular tailwinds is the global golf market. In the U.S., golf rounds have reached record levels for three consecutive years, driving sustained demand for course maintenance equipment and irrigation systems. Higher course utilization increases wear on turf and infrastructure, which in turn raises the need for replacement equipment, irrigation upgrades, and more precise water management. Toro’s leadership position in both golf equipment and irrigation allows it to benefit directly from this trend, while also providing a differentiated, integrated offering that few competitors can match. Beyond the U.S., golf participation and investment remain resilient in several international markets, supporting a longer growth runway. Another important secular driver is the growing need for grounds maintenance across municipalities, universities, sports fields, and institutional campuses. Urbanization, population growth, and higher standards for public spaces are leading to ongoing investment in turf, lighting, and maintenance equipment. These customers tend to operate under long planning cycles and place a high value on reliability, service support, and lifecycle efficiency, which plays to Toro’s strengths in professional-grade equipment and dealer support. Underground construction represents one of the most compelling long-term opportunities. Demand in this market is being driven by the need to install and maintain critical infrastructure such as broadband and fiber networks, data centers, energy transmission, water systems, and telecommunications. Much of the existing infrastructure in developed markets is aging and requires replacement or upgrading, while new infrastructure is being built to support digitalization and energy transition initiatives. These projects are typically planned over many years and supported by public and private investment, making demand more durable than traditional construction cycles.

The Amplifying Maximum Productivity (AMP) program is a reason to invest in The Toro Company because it structurally improves profitability, strengthens operational efficiency, and supports long-term growth independent of short-term demand conditions. AMP is a multi-year productivity initiative designed to permanently lower Toro’s cost base and improve margins through better product design, sourcing, manufacturing efficiency, and route-to-market optimization. Importantly, the program does not rely on higher sales volumes to succeed. Instead, it focuses on making the business simpler, more efficient, and more disciplined, which is especially valuable in periods of uneven demand or macroeconomic pressure. The program has already delivered tangible results. Toro has achieved annualized run-rate cost savings of approximately $86 million through actions such as strategic facility closures, reducing its operational footprint by more than one million square feet, streamlining the salaried workforce, and divesting non-core businesses and product lines. Encouraged by this progress, management has raised the AMP savings target to at least $125 million by the end of 2026, up from an original goal of $100 million. A key strength of AMP is how the savings are deployed. Management plans to reinvest up to 50% of the cost savings back into the business, primarily in innovation, technology, and growth initiatives. This includes investments in autonomous equipment, smart connected systems, and alternative power solutions. The remaining savings flow through to higher margins and stronger cash generation, creating a balanced approach between near-term profitability and long-term competitiveness. The impact of AMP is already visible in financial performance. In fiscal 2025, the Professional segment, which represents about 80% of revenue, increased its earnings margin from 18% to 19,4%. Adjusted gross margin also improved year over year, driven by pricing discipline and productivity gains from the AMP program. Management has emphasized that these improvements were achieved without requiring higher volumes, underscoring the structural nature of the margin expansion. Looking ahead, management expects margin momentum to continue building through 2026 as additional AMP initiatives come online and savings compound.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,17, which is from fiscal year 2025. I have selected a projected future EPS growth rate of 8% (Finbox expects EPS to grow by 8,2% per year over the next five years.) Additionally, I have chosen a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on the fact that The Toro Company has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $27,07. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy The Toro Company at a price of $13,53 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company is essentially its return on investment. The minimum annual return should be at least 10%. I calculate it as follows: The operating cash flow last year was 662, and the capital expenditures were 84. I attempted to analyze their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 59 in our calculations. The tax provision was 62. We have 97,9 outstanding shares. Hence, the calculation will be as follows: (662 – 59 + 62) / 97,9 x 10 = $67,93 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With The Toro Company's free cash flow per share at $5,91 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $67,89.

Conclusion

I find The Toro Company to be an intriguing business with solid management that has built a durable moat through brand strength, market leadership, distribution scale, and deep customer integration. The company has historically delivered a high ROIC, and while ROIC has declined over recent years, this largely reflects acquisitions and increased investment rather than a deterioration of the core business, and returns should improve as these investments mature. Free cash flow reached a record level in fiscal year 2025, but this was driven mainly by temporary factors, meaning this level of cash generation should not be viewed as a recurring annual outcome. Macroeconomic factors remain a risk because demand across both the Professional and Residential segments is closely tied to economic confidence, interest rates, and public and private investment cycles, which can lead customers to delay equipment purchases during weaker periods. Weather conditions are also a risk since demand for Toro’s products depends heavily on seasonal and regional weather patterns, where low snowfall, droughts, or excessive rainfall can reduce or postpone purchases and increase volatility over time. Supply chain risk is another consideration as reliance on global suppliers and trade sensitive materials exposes the company to disruptions, cost inflation, and tariff uncertainty, which can pressure margins and cause missed selling windows, particularly in more price sensitive markets. On the positive side, innovation is a clear reason to invest as Toro focuses on productivity enhancing, autonomous, and data driven solutions that help customers operate more efficiently and make its products more essential and harder to replace. Secular trends also support the long term outlook, with sustained golf participation, rising investment in public and institutional grounds, and multi year infrastructure upgrades providing durable demand for Toro’s equipment and solutions. In addition, the Amplifying Maximum Productivity program strengthens the investment case by delivering structural cost savings and margin improvement without relying on higher sales volumes, while reinvesting part of those savings into innovation to support long term value creation. Overall, I view The Toro Company as a good business, but I believe there are more attractive opportunities elsewhere at the moment, so I am not investing in the company at this time.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope you enjoyed my analysis! While I can’t post about every company I analyze, you can stay updated on my trades by following me on Twitter. I share real-time updates whenever I buy or sell, so if you’re making your own investment decisions, be sure to follow along!

Some of the greatest investors in the world believe in karma, and to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to Soi Dog. They rescue street dogs in Thailand by giving them food, medicine and vet care. If you have a little to spare, please donate here. Even a little will make a huge difference to save these wonderful animals. Thank you.