Dobbs: Bullish on Toro
06/04/2004 12:00 am EST
"Toro is one of the best known companies in America, yet I doubt it’s on the radar screen of a lot of investors," says Lou Dobbs . "Chances are you see its logo every weekend–on your lawnmower or at the local golf course. Even better, it's a long-term wealth-builder."
"Headquartered in Bloomington, Minn., the Toro Company (TTC NYSE) has been around since 1914. It produced its first mower for golf-course fairways as far back as 1921 and its first mower for residential use in 1939. The company has been public since 1978 and hit the billion-dollar sales mark in 1997. Today, in addition to its Toro brand, the company also owns Lawn-Boy, Lawn Genie, Exmark, and Irritrol, and has several other subsidiaries. All of them cater to some set of landscaping needs, from professional landscaping maintenance equipment and irrigation systems to lawnmowers for people like you and me.
"I think Toro is a long-term wealth-builder for four important reasons: 1) its ambitious growth goals and creative employee incentives to meet those goals; 2) it beat last quarter’s expectations, a trend I believe will continue; 3) the stock is reasonably valued with a p/e ratio around 17; and 4) its exemplary corporate governance structure, which aligns the interests of shareholders, employees and customers. It also has a formal code of ethics for its senior executives– something I think is sorely needed at more of America’s companies.
"One of the big reasons for the company’s success is CEO Kendrick Melrose, who joined Toro in 1970 as director of marketing. He took over the CEO spot in 1983 when the firm was buried in red ink and unsold snowblowers. In the two decades since, Ken has made Toro the premier name in outdoor landscaping and beautification. He did it with a straightforward, no-nonsense approach to market development, corporate management, and employee relations. Let me share one example:
"To motivate his employees, he introduced a program called ‘5 by Five’, which was in place from 2001-2003. The goal was to increase after-tax profitability from 2.7% to 5.5%, by focusing on 5 areas: reducing cost of goods sold, reducing inventories, improving cash to cash accounts payable/accounts receivable spread, reducing selling, general and administrative expenses, and using synergy within the company. As incentive, he announced that if this goal was met, everyone except management would get two weeks of extra paid vacation or a cash award. The result was that the firm made the 5.5% after-tax profitability goal in 2003.
"That’s impressive, and while employees celebrated reaching that goal, investors have been celebrating, too. Toro has done very well for its shareholders over the past few years, in part by shifting the majority of its business to the commercial sector. Looking back at the stock’s history, you see a pattern of solid, steady growth. Over the last five years, TTC has returned investors 271%, with most of that occurring since the company began to focus on its profitability three years ago. Investors are up 52% in the last year, and 149% over the last two. Toro is a relentless and broad-based grower, with a stock to match."