Those Lawns Won't Mow Themselves

 | Mar 05, 2012 | 9:30 AM EST
  • Comment
  • Print Print
  • Print
Stock quotes in this article:




























For the U.S. housing market, there are signs of life on every avenue. But, while this comeback story has certainly been discussed this year, in many respects it's been taking back seat to the most miniscule of rumblings from across the pond. Nonetheless, just fix your eyes on where housing-related green shoots have sprouted of late:

1. Pending home-sales increase in January was a full percentage point above consensus, with a decent positive adjustment to December.

2. Fixed investment in both residential and nonresidential real estate positively contributed to fourth-quarter gross domestic product. (As a side note, in lending corporate support to this GDP component, consider the rebound in Stanley Black & Decker's (SWK) commercial security-system business.)

3. We've seen fourth-quarter upticks in larger-ticket purchases at Home Depot (HD) and Lowe's (LOW). There's also been encouraging commentary from management on the professional customer -- meaning, for the most part, the contractor is now taking his materials list to the home centers, whereas there was no list a year ago.

4. In December and January, employment in the construction sector rose by 52,000 jobs.

5. Homebuilders Toll Brothers (TOL) and Beazer (BZH) reported sizable increases in net signed contracts (units) and backlog.

Yet, despite the splashy in-your-face housing numbers -- "splashy," at least, considering the depths plumbed beforehand -- I found myself all over the map in pinning down possible stock plays. I was eager to pick names that offered must-have product to a variety of housing patrons. First, there are investors to consider -- for example, those buying up entire Detroit blocks. There are also renters who have finally decided to buy their abodes at these depressed prices, as well as those homeowners secure enough in the economy to embark on spruce-up projects.

With that in mind, carpet-maker Mohawk (MHK) seemed like a good choice -- surely home flippers wouldn't be able to sell a place with moldy rugs -- as did Pink Panther insulation provider Owens Corning (OC). That latter name would benefit from new unit builds and flipper exposure, plus those seeking energy-efficiency upgrades.

However, as I so often do when analyzing a company, first and foremost I paid homage to the market forces and compared the stock prices to broader indices -- as well as, perhaps, a sector-specific ETF. With housing data clearly being a driver of market sentiment year to date, at the very least I wanted to see a positive stock performance on a relative basis for the past month. In a perfect scenario, I wanted a stock that's blown by the market's performance since the beginning of February. Unfortunately, and somewhat shockingly, this is what I found.

Housing Stocks -- Four-Week Change

Strange, right? I eliminated Sherwin Williams (SHW) from the equation based on the fact that valuation, cost pressures and home centers are really pushing the virtues of its new private-label paint offerings. The company I left off the list, meanwhile, was Toro (TTC) a maker of turf-maintenance equipment. Toro shares are approaching their all-time closing-price high from April 2011 (yes, that would be the famed market peak).

If the latest guidance raise is any indication, I don't believe Toro has reached fair value at 13.5x forward projection, and its earnings power seems underappreciated. (Toro's fiscal year ends in October, so this multiple is on October 2013 projections.) Toro's nine-year mean price-to-earnings multiple is roughly 16x. I don't want to be a pig in my multiple projection, so I'm assigning 15x -- below the rate of earnings growth I expect, at $5 per share -- for expected earnings for fiscal 2013. For purposes of comparison, the high estimate on the Street is $5.30 per share; consensus is $4.96.

Here are a few factors that went into the analysis:

1. Rounds of golf played in the U.S. have made an outright poor showing for three years straight, and ditto on gold-equipment sales. My sense is that private and public golf clubs have underinvested in the kind of maintenance equipment Toro provides, and are now playing catch-up to remain competitive. After all, private clubs want to attract new members, and public courses have to set themselves apart from nearby facilities. The idea has shown up in Toro's golf-equipment business this spring, and the company's competitive position has also been strengthened by the recent acquisition of a greens-roller product line from Graden.

2. Also of interest to me is the opportunity to leverage a newly acquired Astec line of underground-utilities tools.

3. Toro has gained market share at home centers -- no small feat, given that these do-it-yourself meccas have been tightly editing their assortments and managing inventory. I attribute the success to Toro's innovation in zero-turn riding mowers, and even in the walk-behind category.

4. Renters are unlikely to have a mower in storage, and housing investors will have to mow the lawns themselves or contract out, meaning landscapers will have the funds to invest in new equipment.

(Disclosure: I began using Toro walk-behind mowers when I was seven. If you need a wicked design carved into your lawn, I am your guy.)

Columnist Conversations

I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
View Chart »  View in New Window »
we will add this here to cheaply protect our downside a bit BOUGHT SPY SEP 244 PUT AT 2.70 ...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.