Toro Company (TTC): Residential Surge and Infrastructure Tailwinds Signal Undervalued Opportunity

The Toro Company (NYSE: TTC) has emerged as a compelling investment opportunity in the wake of its Q2 2024 earnings, which revealed robust residential sales growth and strategic progress in inventory management. Coupled with its exposure to global infrastructure spending through underground construction equipment, the company is positioned to capitalize on long-term trends even as it navigates near-term margin pressures. Here's why investors should consider TTC as an undervalued play on two key growth drivers.

Residential Segment Ignites Momentum

The residential segment's 26.3% sales surge to $335.6 million—driven by strong mass-channel distribution and favorable spring weather—marks a pivotal shift in Toro's strategy. The partnership with retailers like Lowe's has amplified reach, while inventory reductions in dealer channels reflect disciplined supply chain management. This progress is underscored by a 59% jump in residential earnings to $36.1 million, with margins expanding to 10.8% from 8.6% a year ago.

The residential rebound is no flash in the pan. Favorable weather patterns and shifting consumer preferences toward outdoor living have created a durable demand backdrop. As Toro continues to optimize inventory levels—reducing dealer field stock through lower shipments and stronger retail pull-through—operational efficiencies will further bolster margins over time.

Infrastructure Tailwinds: A Long Road Ahead

Toro's Professional Segment, while facing a 5.9% sales decline due to weaker zero-turn mower demand, is buoyed by its underground construction business. Sales of the Ditch Witch AT120 horizontal directional drill and other infrastructure-focused equipment rose sharply, reflecting a “long runway of robust private and public spending” on global infrastructure.

The company's exposure here is critical. Global infrastructure spending is projected to hit $3.7 trillion annually through 2030, with energy transition, data centers, and transportation upgrades forming the core of this growth. The Ditch Witch brand's ability to serve markets like utility installation and pipeline construction positions Toro to capture a meaningful share of this demand.

Valuation: A Discounted Play on Growth

Toro's valuation metrics highlight its undervalued status. With an EV/EBITDA of 11.7x and a trailing P/E of 11.1x, the stock trades below the median 12.7x EV/EBITDA multiple for European industrial peers. This discount persists despite strong EBITDA of $722.8 million and a clear path to margin recovery as production inefficiencies subside.

Analysts estimate a fair value range of $67.67–$82.39, with the midpoint at $75.24—just 0.4% below current levels. This suggests minimal downside risk while offering asymmetric upside as infrastructure spending accelerates and residential demand stabilizes.

Navigating Near-Term Challenges

Current headwinds include elevated material costs and manufacturing inefficiencies tied to production adjustments. Gross margins contracted to 33.6% in Q2, down from 35.8% in 2023, while operating margins dipped to 14.2%. However, these pressures are temporary. The AMP initiative (Amplifying Maximum Productivity) aims to reduce costs by $100 million annually by 2025, which should offset inflationary headwinds and support margin expansion.

Moreover, the backlog in underground construction equipment—a key infrastructure indicator—remains elevated, signaling sustained demand. The company's ability to ramp up production and manage inventory will be critical to converting these orders into cash flow.

Conclusion: A Compelling Buy at Current Levels

Toro's Q2 results underscore its dual engines of growth: a revitalized residential business and an infrastructure-focused Professional Segment. While margin pressures and macroeconomic uncertainty linger, the stock's valuation and strategic positioning argue for a buy rating. Investors should focus on the long-term trajectory: residential demand is stabilizing, infrastructure spending is a multiyear tailwind, and Toro's operational discipline will drive margin recovery.

Investment Advice:
- Entry Point: Consider accumulating positions near the current $75.58 level, targeting a $80–$85 price target within 12–18 months.
- Risk Management: Monitor inventory levels and order backlogs in the Professional Segment, as delays could pressure margins further.
- Catalysts to Watch: Infrastructure policy developments in the U.S. and Europe, EBITDA margin improvements post-2025, and residential sales trends in Q4 2024.

In a market seeking tangible growth stories, Toro's combination of execution and exposure to secular trends makes it a standout opportunity.