• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Consumer Discretionary

Those Lawns Won't Mow Themselves

If you're tooling around for a housing-comeback trade, this turf-equipment maker is a nice choice.
By BRIAN SOZZI Mar 05, 2012 | 09:30 AM EST
Stocks quotes in this article: TOL, BZH, MHK, OC, SHW, TTC, HD, LOW, SWK, SMG, PPG, LL, HOV, DHI

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.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Sozzi had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary

More from Consumer Discretionary

Should Investors Dine Out on Darden Restaurants?

Bruce Kamich
Mar 23, 2023 10:23 AM EDT

Let's check out the charts and indicators for the owner of Olive Garden, LongHorn Steakhouse and other restaurant chains.

Bearish Bets: 3 Stocks You Should Consider Shorting This Week

Bob Lang
Mar 19, 2023 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Dutch Bros Is Running Out of Caffeine

Bruce Kamich
Mar 17, 2023 11:27 AM EDT

Let's do a drive-through on the charts.

Williams-Sonoma Jumps But May Need More Basing Than Basting

Bruce Kamich
Mar 16, 2023 10:43 AM EDT

The stock is moving higher buoyed by a dividend hike and share buyback program.

Bearish Bets: 3 Well-Known Stocks You Should Think About Shorting This Week

Bob Lang
Mar 12, 2023 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:56 PM EDT PETER TCHIR

    Very Cautious

    I am very cautious here. I don't like how the c...
  • 08:58 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    How to Adjust Your Trading Style as Market Conditi...
  • 05:00 PM EDT CHRIS VERSACE

    AAP Podcast on the Fed Decision!

    Listen here!
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

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

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.

FactSet 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.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login