The Ratings Game: Toro stock is a sell as golf playing slows, gas mower market shrinks, BofA says


Shares of Toro Inc. were cut down Wednesday, after BofA Securities recommended investors sell, citing concerns over gas mower engine shortages, a shrinking gas mower market and a streak of monthly declines in golf rounds played.

Analyst Ross Gilardi downgraded Toro to underperform, after starting coverage of the turf equipment maker in January with a neutral rating. He slashed his stock price target by 28%, to $85 from $118. The new target implies about 10% downside from current levels.

The stock dove 4.9% in afternoon trading, putting them on track for the biggest one-day loss in 16 months. It has now sunk 18.7% since it closed at a record $116.51 on May 7, while the S&P 500 index has gained 8.1% over the same time.

“Toro faces secular challenges in its residential segment, and the combination of soaring input costs, acute gas lawn mower engine shortages and rising competition is a formula for margin headwinds in 2022,” Gilardi wrote in a note to clients.

He said Toro hasn’t had a down earnings year in at least a decade, but there is a risk that the company has a down first half of 2022, which would need a sharp acceleration in the back-end of the year to avoid a down 2022.

Gilardi is also concerned about data showing that overall golf rounds played have declined for four straight months, because given that Toro has close to half of the golf mowing market share, the stock has historically been correlated with golf rounds played.

Regarding the gas engine shortage, Gilardi said that while Toro is dependent on outside suppliers, the shortage is much more than just an issue of supply chain disruptions at a time of strong demand: “The problem is that very few existing players want to add gas lawn mower engine capacity because it is a slowly dying business.”

He noted, citing data from Techtronic Industries, that the among larger mowers, gas engines make up 70% of the market this year, down from 86% market share in 2017. And among the handheld mower market, the market share for gas engines has fallen to 37% this year from 47% four years ago.

And with California planning to ban gas-powered lawn mowers, as well as leaf blowers and chain saws, as early as 2024, Gilardi said it would make sense for some large retailers to start pulling gas-powered equipment off their shelves.

Regarding golf, after coming off “two good years,” rounds played has decelerated the past four months. Weather may have played a factor, but the 8% decline in rounds played in September resulted from declines in every region except the Pacific.

“Some of this is weather driven, due to hurricanes and storms through the summer, but it could also be that individuals are slowly migrating back to the office, venturing out on vacations, going to ball games and concerts that are competing with their golf spend,” Gilardi wrote.

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