Shares of Toro Co. (TTC) gained over 2% and closed at $62.51 after reporting an improved third-quarter (ended Aug 1, 2014) results on Aug 21. Earnings increased 28% year over year to a record 87 cents per share. Earnings came ahead of the Zacks Consensus Estimate by a penny as well as above management’s guidance of 80 cents per share.

Operational Update

Sales grew 11% year over year to hit a record of $567.5 million, beating the Zacks Consensus Estimate of $566 million. Year-over-year growth was driven by strong retail demand for both professional and residential products.

Cost of sales rose to $365 million from $332 million in the year-ago quarter. Gross profit increased 13.5% year over year to $202 million. Gross margin rose 70 basis points (bps) year over year to 35.6%, due to favorable product mix and realized pricing, offset by higher commodity costs.

Selling, general, and administrative expenses went up 8.9% year over year to $130 million, primarily driven by the leveraging of expenses over higher sales volumes. Operating profit increased 23% year over year to $72 million. Operating margin expanded 120 bps year over year to 12.7%.

The Toro Company - Earnings Surprise | FindTheBest

Segmental Performance

Professional: Net sales from this segment grew 12% year over year to $384 million, primarily due to increased sales of golf equipment and irrigation products on the back of strong retail demand for innovative products. Sales also benefited from the revisiting of normal quarterly flow of equipment channel purchases, subject to Tier 4 emission standards. The Professional segment posted earnings of $74.8 million, up 4.8% from the prior-year quarter.

Residential: This segment reported sales of $175.7 million, up 13% year over year. Growth was attributable to an increased early demand as channel partners began to prepare for the anticipated strong pre-season retail. Further, sales of residential zero turn mowing products grew on continued retail demand for these mowing platforms. The residential segment reported earnings of $18.7 million, up 24% year over year.

Financial Update

Toro ended the quarter with cash and cash equivalents of $178 million, as against $161 million at the end of the prior-year quarter. Cash from operations for the nine months ended Aug 1, 2014 was $164 million, compared with $158 million in the year-ago comparable period.

Long-term debt was $224 million as of Aug 1, 2014, flat compared with $223.5 million as of Aug 2, 2013. The debt-to-capitalization ratio contracted 170 bps to 35.3% as of Aug 1, 2014 from 37% as of Aug 2, 2013.

Outlook

For full-year fiscal 2014, Toro revised its revenue growth guidance of 5–6% to around 6%. The company also raised its net earnings per share guidance for the year to a range of $2.94–$2.96 from the previous $2.90–$2.95.

Our Take

There will be continued growth in construction of golf courses around the world, which bodes well for Toro. Toro successfully closed a number of equipment packages and distributors open order banks remain strong. Toro will also benefit from improvement in the housing and construction sector. Development of innovative products will also drive growth.

Moreover, the ongoing construction activity will offer opportunities for residential and commercial irrigation and lighting businesses. Toro anticipates its international businesses to benefit from strong snow thrower demand in Canada and continued golf projects.

However, foreign exchange volatility along with social and political unrest, remain the headwinds.

Bloomington, MN-based Toro is a worldwide provider of turf and landscape maintenance equipment as well as irrigation solutions for golf courses, sports fields, public green spaces, commercial and residential properties and agricultural fields. The company operates through two segments: Professional and Residential.

Toro currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in same sector include Churchill Downs Inc. (CHDN), Choice Hotels International Inc. (CHH) and Capella Education Co. (CPLA). All these stocks carry a Zacks Rank #2 (Buy).

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