The Toro Company (TTC): A Bull Case Theory for Contrarian Investors

The Toro Company (TTC), a stalwart in the industrial equipment sector, has long been a case study in resilience. Despite a recent dip in stock price following its fiscal 2025 second-quarter results, the company's fundamentals tell a different story. With a Return on Equity (ROE) of 26.02%—a figure that rounds to a robust 28%—and improving analyst expectations, TTC offers a compelling case for contrarian investors willing to look beyond short-term volatility.

Contrarian Value Investing: The Case for TTC

Contrarian value investing thrives on market mispricings, and TTC's current valuation appears to reflect an overreaction to near-term challenges rather than a fundamental shift in its business model. The company's ROE, while slightly below its 10-year average of 34.83%, remains well above the S&P 500's historical average of 15%. This metric underscores TTC's ability to generate strong returns on shareholder capital, particularly in its Professional segment, which reported a 19.9% profit margin in Q2 2025—up from 19.0% the prior year.

The Professional segment, which includes golf and grounds equipment, has become a cash-cow for Toro. Revenue here grew 0.8% year-over-year to $1.01 billion, driven by demand for high-margin products like turf maintenance systems. Meanwhile, the Residential segment, which includes walk-behind mowers and zero-turn models, has struggled with declining demand (-11.4% sales in Q2) and rising material costs. Yet, this weakness is a short-term headwind, not a long-term threat. The Residential market is cyclical, and Toro's brand loyalty and innovation pipeline—such as hybrid and electric mowers—position it to regain traction as consumer confidence rebounds.

Improving Analyst Expectations and Strategic Resilience

While TTC's stock has faced downward pressure in recent months, analyst expectations are quietly shifting. For fiscal 2025, the company's adjusted diluted EPS guidance of $4.15–$4.30 is in line with consensus estimates, and its 3-year EPS growth projection of 8.9% (versus the S&P 500's 10%) suggests a stable trajectory. Over the past 90 days, TTC has seen five downward revisions to its EPS estimates, but the recent beat in Q2 adjusted EPS ($1.42 vs. $1.38 expected) has sparked cautious optimism.

The company's strategic focus on cost discipline and operational efficiency further bolsters its case. Despite macroeconomic headwinds, Toro maintained a 13.3% operating margin in Q2, matching the same period in 2024. Its ability to absorb inflationary pressures—through supply chain optimization and pricing power—highlights its defensive positioning in an industrial sector often overlooked by growth-focused investors.

Defensive Positioning and Long-Term Cash Flow Stability

TTC's business model is inherently defensive. Unlike cyclical manufacturers reliant on new construction or consumer discretionary spending, Toro's products are essential for maintaining infrastructure and public spaces. Golf courses, municipal parks, and commercial grounds require regular maintenance regardless of economic conditions, ensuring stable demand for the Professional segment.

The Residential segment, though more volatile, is also showing signs of stabilization. With interest rates stabilizing and housing turnover rates rebounding, demand for lawn care equipment is likely to recover. Moreover, Toro's shift toward premium, durable products—such as its battery-powered zero-turn mowers—positions it to capture market share in the growing sustainable equipment niche.

Valuation: A Discount to Intrinsic Value

At a P/E ratio of 18.5x and a PEG ratio of 0.43, TTC appears significantly undervalued relative to its earnings growth prospects. This discount is particularly striking given its 28% ROE and consistent cash flow generation. The company's stock has underperformed the S&P 500 by 12% over the past year, yet its balance sheet remains strong, with $1.41 billion in stockholders' equity and a manageable debt load.

For patient investors, the current valuation offers a margin of safety. Even if TTC's EPS growth slows to 6% annually over the next decade (a conservative assumption given its ROE and market position), the stock could appreciate 40–50% from current levels. This assumes a re-rating to a P/E of 25x, which is achievable given its improving margins and industry-leading ROE.

Conclusion: A Buy for the Long-Term

The Toro Company is a textbook example of a business that trades at a discount to its intrinsic value. Its strong ROE, improving analyst expectations, and defensive positioning in the industrial sector make it a compelling buy for contrarian investors. While short-term challenges in the Residential segment may persist, the company's focus on innovation, operational efficiency, and high-margin Professional products ensures long-term resilience.

For those willing to ignore the noise of quarterly volatility, TTC offers a rare combination of quality and affordability—a hallmark of successful value investing. As the market eventually recognizes this, the rewards for patient investors could be substantial.