Streetwise

Lauren Rudd

Sunday, October 23, 2011

Vince Lombardi Calls the Investing Game

Vince Lombardi’s famous “Number One” soliloquy epitomizes the way you should look at your investment portfolio. Lombardi said, “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.”

These are not harsh words, rather they are pertinent to what your investment strategy should be; a selection of only the best investment candidates with judicious attention being paid to profitability and intrinsic value.

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. 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 often occurring far more frequently than the former. Yet, speculators do provide liquidity to the markets.

As an investor you eliminate much of the random element, or risk, through diligent research and the utilization of a reasonable time horizon. The time factor not only alleviates minor share price fluctuations, but enables you to benefit from a continual compounding of profits.

Furthermore, you should always have a list of companies that meet your investment criteria except for share price. Stocks you would act on when market rather than company specific events drive the price down. A good example might be Toro (TTC).

If you are not familiar with the name you probably never had a lawn, fallen snow or leaves to deal with. My 12-month target price on the shares a year ago was $64, versus a price back then of $56.81. The shares recently closed at $53.07. Ouch! Yet, my earnings estimate for 2010 was $2.73, while Toro’s 2010 earnings came in at $2.79, meaning that my fundamental analysis was too conservative.

So why the share price decline? Like so many other companies, a market drop that began in July took the share price from the $64 level down to where it is today. In actuality you probably would have placed a sell stop order at about the $62 level. However, Monday morning quarterbacking is always easy. The important question is whether Toro is currently a winning first team player.

For its fiscal third quarter ended July 29, Toro reported a five percent increase in earnings to $1.11 per share, the result of increased global demand for golf and grounds equipment and despite unfavorable weather conditions that resulted in lower residential and landscape contractor sales. In addition, one-time reworking expenses for its standup lawn mower cut into earnings by 9 cents per share. Regardless, revenue still increased 9.2 percent to $501 million.

The quarter’s gross margin declined by 1.7 percent to 33.5 percent, due to the mower rework issue, increased commodity costs, and higher freight expenses. For the first nine months, gross margin fell 0.2 percent to 34.2 percent.

Selling, general and administrative expense, as a percent of sales, fell 0.9 percent in the third quarter to 22.6 percent, and for the first nine months decreased a full percentage point to 22.6 percent. Interest expense for the third quarter was $4.3 million, up slightly, while for the first nine months it declined slightly to $12.6 million.

Accounts receivable at the end of the third quarter totaled $199 million, up 17 percent from the prior year period, on a sales increase of 9 percent, while net inventories increased 31 percent to $232.4 million. In its guidance going forward, Toro said that for its fiscal year it expects earnings of $3.60 per share on 10 to 12 percent revenue growth.