Streetwise

Lauren Rudd

Sunday, October 21, 2012

Look to TTC

Are you worried about what will happen on December 31, when the Bush tax cuts fall by the wayside, or rather go over what many are calling the "fiscal cliff," accompanied by an across the board 10 percent government spending cut?

There is an understandable wave of apprehension engulfing Wall Street and Main Street over the possibility that the scheduled $500 billion worth of tax increases and the $100 billion in government spending cuts scheduled to begin on January 2, will trigger an economic Tsunami.

Relax; the end of the world is not near. Moreover, there is a growing consensus of opinion among economists that Congress will modify the so-called fiscal cliff of sharp tax hikes and spending cuts and that the rate of economic growth will increase in 2013.

A survey by the National Association for Business Economics that included economists from companies such as Ford, DuPont, and JPMorgan Chase, support the belief that most of the fiscal cliff dangers will be avoided, sparing the economy from much of the potential damage. According to the NABE survey the economy is expected to expand 2.4 percent next year, up from a projected growth rate of 1.9 percent in 2012.

Approximately 55 percent of the NABE survey’s respondents believe the tax cuts enacted under former President George W. Bush will be extended for all taxpayers in 2013, while 36 percent expect the lower tax rates will be extended for lower-income individuals but not for those with higher incomes. And about four-fifths of the economists polled predict that planned spending cuts will be greatly watered down.

If the stock market is really a forward looking indicator, as many believe, then its recent performance concurs with what the majority of NABE forecasters are saying, which is not to say you should become complacent.

A degree of uncertainty and resultant market volatility will continue unabated, meaning that you should always have a list of companies available that meet your investment criteria, along with a specified “bargain price” for each. Stocks you would act on when market, rather than company specific, events drive a company’s share price into bargain territory.

One example of a company with which to begin your list 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.

When I last talked about Toro a year ago, my 12-month target price on the shares was $32, after allowing for a July 2 stock split, versus a price back then of $28.40. The shares recently closed at $40.32, producing a 12-month gain of 42 percent. My earnings estimate for 2011 was $1.76 and the company chalked up earnings of $1.85, which means that I was a bit light in my analysis.

For its fiscal third quarter ended August 3, Toro reported net earnings of $0.67 per share, on a net sales increase of 0.6 percent to $504.1 million. In the comparable fiscal 2011 period, the company delivered net earnings of $0.55 per share, on net sales of $501 million.

For the first nine months of fiscal 2012, Toro reported net earnings of $2.13 per share, on a net sales increase of 6.8 percent to $1.619 billion. In the comparable fiscal 2011 period, the company posted net earnings of $1.76 per share on net sales of $1.515 billion.

However, given the effects of recent weather conditions, the ongoing economic struggles in Europe, and the desire to right size field inventory levels, in its guidance going forward the company indicated it now expects revenue growth for fiscal 2012 to be about 4 to 5 percent. Net earnings are projected to be about $2.10 per share, which continues to include the $0.08 negative earnings per share impact related to acquisitions.

The intrinsic value of the shares using a discounted earnings model with a growth rate of 15.93 percent and a discount rate of 12 percent is $71.41, while the free cash flow to the firm model yields an intrinsic value of $116. My current 2011 earnings estimate is $2.10 per share for 2012 and $2.40 for 2013. My 12-month target price is $46, for an annualized gain of 15 percent. There is also dividend yield of 1.10 percent.