Investors gave Toro the cold shoulder

Investors snapped the cold shoulder at Toro Co. throughout June, leaving the lawn and snow equipment maker with little question that it will take more than warm weather and a few promises to defrost their angst.

The stock, trading near $34 a share, is down 29 percent from early May and well below its 52-week high closing of $62.21 last July 16. It's slid steadily ever since the Bloomington-based company downgraded earnings expectations May 2 and reported lackluster results three weeks later. Second quarter earnings fell 16 percent and revenues fell 7 percent.

Officials blamed the dangblasted late spring and the weakening economy and pledged to continue strangling costs, cutting inventory and investing in growth. Spring came, summer's here. And mower sales should be humming right along.

But despite warmer temps that finally arrived to beckon grass from the earth and mowers from the store, investors are not easily persuaded that Toro's on the mend.

Officials said revenues will flatten in 2008 and earnings will fall 5 percent because of recession-weary consumers and skyrocketing steel, plastic, petroleum and other raw material costs.

"Mother Nature has not been kind to Toro," said Janney Montgomery Scott research analyst Jim Lucas. "The issue this year is you get the double whammy of a weak domestic economy and a poor spring season."

Landscapers didn't upgrade lawn equipment, he said. Because of the economy, some homeowners fired their gardeners and took to mowing their lawns themselves with pedestrian equipment rather than Toro's professional products that make up 70 percent of its revenue base.

Still, Lucas said investors are being shortsighted and taking a "me too" approach to the stock. "The point that is overlooked is their cash flow and the fact that they do generate a healthy amount of it and reallocate it in a shareholder-friendly way" via dividends and share repurchases, he said. "Long term, Toro is one of the leading brands and it's known for innovation, which shows up in their margins."

Investor relations director John Wright acknowledged Toro's sagging stock price, but added, "The investors we talk to say you are not getting credit for this and this and this."

Toro mostly sells to the golf course, landscaping and commercial real estate sectors, Wright said, noting investors are incorrect to think that consumers' recently tightened purse strings will trip Toro's stride.

In fact, Wright cited key growth areas over the next several years: international sales, agricultural irrigation and water management systems, and its cherry red, timesaving "zero-turn" mowers, which officials proudly demonstrated for the golf and trade press at a shindig at its spacious headquarters last month.

Toro Group Vice President Dennis Himan also introduced Toro's new $100,000 grounds mower that slays fields of grass in single 16-foot passes.

"It has onboard diagnostics and has mow and snow [capabilities] and is great for ballfields. It's amazing. It's like a Swiss Army knife three times over," Himan said.

Meanwhile, Toro's micro-irrigation business is also growing. Its drip tapes -- watering systems that lurk 20 inches below the soil -- and automated rain-sensing shutoff devices are increasingly used by U.S. and overseas farmers, Himan said.

"Right now micro-irrigation is 4 percent of revenues but we believe it will be a significant part of our revenue going forward," because water is becoming scarce, Himan said.

Lucas agreed. "The demand is definitely there."

Meanwhile overseas business is booming. In 2003, 19 percent of Toro's sales came from outside the United States. This year 30 percent of Toro's $1.88 billion in revenues will come from other countries.

There are 15,000 18-hole golf courses overseas and 200 more sprout every year. Toro intends to equip as many of them as possible, said Darren Redetzke, international general manager, noting opportunities in Russia, Korea, China, Africa and even the Middle East.

Toro already equips Beijing's Olympic village, England's Wimbledon and Wembley stadiums and is pursuing more golf course and water management business in Australia, which "just went through one of the worst droughts in history," Redetzke said. "There are 4-year-olds who have never seen rain."

But Toro is not just looking at increasing sales in its effort to win back investors. Toro is taking a magnifying glass to its factories and searching for waste to cut. Such efforts already slashed administrative and production costs and helped stabilize gross margins, CEO Mike Hoffman told analysts last month.

"We are just going to be taking a hard look at ... where can we drive cost down and where does it make sense to price [upwards], and how do we drive long-term growth in revenues and profit," Hoffman said. "Can't give you much more of a solid answer beyond that right now."

Dee DePass • 612-673-7725