Streetwise

Lauren Rudd

Sunday, October 31, 2010

"There Is No Room For Second Place"

Vince Lombardi’s famous “Number One” soliloquy epitomizes the way I believe you should look at your investment portfolio. In summary, it says, “There is no room for second place. There is only one place in my game, and that's first place. ...There is a second place bowl game, but it is a game for losers played by losers.”

Were those harsh words? No, I do not think so. Rather they are quite pertinent to what your investment strategy should be. A successful investment program requires that you select only the best investment candidates. By paying judicious attention to profitability and intrinsic value you can easily separate the wheat from the chaff.

Keep in mind that I am directing my comments at investing and not trading, a polite word for speculation. A speculator is about as much an investor as a Las Vegas gambler. That statement is not intended to be derisive. Whenever there is a profit to be made by successfully picking the correct outcome of a random event there will be those wanting to bet on the outcome, regardless of risk.

And as in every game of chance there will be winners and losers, with the latter occurring far more frequently than the former. Yet, to their credit, speculators on Wall Street serve a key role in that they provide liquidity to the markets.

An investor eliminates much of the random element or risk through diligent research and the utilization of a time horizon that is measured in months or years, rather than hours or minutes. This time factor not only alleviates minor share price fluctuations, but enables you to benefit from a continual compounding of profits.

Consider for example Toro (TTC), a company whose share price has increased year-to-date by over 38 percent. If you are not familiar with the name you probably had never had a lawn. My 12-month target price on the shares a year ago was $44, as compared to the price back then of $38. The shares recently closed at $56.81 for a capital gain of 48 percent. My earnings estimate for 2009 was $1.67. Toro’s 2009 earnings came in at $1.72, a nice surprise.

For its fiscal third quarter ended July 30, Toro reported net earnings of $33.4 million, or $1.01 per share, on net sales of $458.9 million. In the comparable fiscal 2009 period, the company reported net earnings of $19.8 million, or $0.54 per share, on net sales of $394.9 million.

Gross margin for the fiscal 2010 third quarter improved to 35.2 percent from 33.9 percent in last year’s third quarter. The margin improvement resulted primarily from a more favorable product mix and lower manufacturing variances.

Selling, general and administrative expenses for the fiscal 2010 third quarter totaled $107.8 million, up 14.5 percent from last year’s third quarter, but declined as a percent of sales to 23.5 percent from 23.9 percent.

Interest expense for the fiscal 2010 third quarter was $4.2 million compared with $4.4 million a year ago. The effective tax rate for the fiscal 2010 third quarter was 35.7 percent compared with 36.6 percent a year ago.

Accounts receivable at the end of the fiscal 2010 third quarter totaled $170.1 million, a decrease of $99.8 million from last year’s third quarter, on a sales increase of 16.2 percent. Net inventories in the third quarter were $177.2 million, up $16.6 million from the same period last year. Trade payables were $118 million, up $49.7 million from last year’s third quarter.

At the end of the third quarter, the company’s 12-month average net working capital as a percent of sales was 15.4 percent compared with 27 percent a year ago, reflecting a continued focus on inventory, accounts receivable and trade payables management.