The Toro Company has been treading water for the past six months, recording a small loss of 0.5% while holding steady at $95.27. The stock also fell short of the S&P 500’s 8.9% gain during that period.

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Why Is The Toro Company Not Exciting?

We’re cautious about The Toro Company. Here are three reasons we avoid TTC, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, The Toro Company grew its sales at a tepid 4.7% compounded annual growth rate. This fell short of our benchmark for the industrials sector.

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.

The Toro Company’s unimpressive 4.5% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

Unfortunately, The Toro Company’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

The Toro Company’s business quality ultimately falls short of our standards. With its shares underperforming the market lately, the stock trades at 19× forward P/E (or $95.27 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our all-time favorite software stocks.

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