Executive Summary / Key Takeaways

• Professional Segment Powerhouse: Toro's Professional segment delivered 5.7% revenue growth in Q3 FY2025 with margins expanding 250 basis points to 21.3%, demonstrating the company's ability to drive profitability even as the Residential segment collapses. This performance, driven by underground construction and golf/grounds momentum, validates the strategic pivot toward higher-margin, less cyclical markets.

• AMP Initiative Tracking Ahead: The Amplifying Maximum Productivity program has delivered $75 million in annualized cost savings and is tracking "well ahead" of its $100 million target by fiscal 2027. These savings are funding innovation while offsetting tariff headwinds, creating a self-funding transformation that enhances earnings power without sacrificing growth investments.

• Residential Kitchen-Sink Moment: The Residential segment's 27.9% sales decline and margin compression to 1.9% reflect a cyclical trough, not structural decline. Management's aggressive inventory clearing, footprint rationalization, and the $81.1 million Spartan impairment create a cleaner foundation for 2026 recovery when consumer confidence returns.

• Valuation at Inflection Point: Trading at $71.38 with a 21.7x P/E and 14.3x free cash flow multiple, Toro sits at a reasonable valuation relative to peers while generating superior margins and cash conversion. The market appears to be pricing in residential headwinds without fully crediting the Professional segment's margin expansion and the eventual residential rebound.

• Two Key Variables to Watch: The investment thesis hinges on whether Toro can maintain Professional segment momentum as infrastructure spending moderates, and whether residential channel inventory clearing translates to demand recovery in 2026. Tariff mitigation success and AMP execution are the operational levers that will determine if margins continue expanding.

Setting the Scene: A Century-Old Company Reinventing Itself

The Toro Company, founded in 1914 and headquartered in Bloomington, Minnesota, has spent 110 years building equipment that shapes the land beneath our feet. For fifteen consecutive years through fiscal 2024, Toro grew its top line, a streak that speaks to its resilience across economic cycles. Yet the company that emerges in 2025 is fundamentally different from the one that achieved that record. Toro now makes its money through two distinct lenses: a Professional segment serving golf courses, underground construction crews, and landscape contractors; and a Residential segment selling mowers and snow throwers to homeowners.

This bifurcation matters because these businesses face opposing forces. Professional customers have jobs that must get done regardless of economic sentiment. A golf course superintendent cannot defer fairway maintenance. A utility contractor must lay fiber optic cable to meet data center demand. These customers buy based on productivity returns, not consumer confidence. The Residential segment, by contrast, lives and dies on homeowner psychology. When interest rates hover near multi-decade highs and consumer confidence wavers, big-ticket lawn equipment purchases get deferred. This dynamic explains why Toro's Professional segment grew 5.7% in Q3 while Residential plummeted 27.9%.

The industry structure reinforces this divergence. Infrastructure spending represents a multi-year tailwind, with over $630 billion needed for U.S. water systems alone and 30,000 miles of hydrogen pipeline planned across Europe. Golf participation exceeded 28 million players in 2024, the seventh consecutive annual increase, driving course investment. Meanwhile, the residential outdoor equipment market faces post-pandemic correction and macroeconomic caution. Toro's strategic positioning across these divergent markets creates both risk and opportunity.

History with Purpose: How Acquisitions and Divestitures Shaped Today's Toro

Toro's current form is no accident. The 2019 acquisition of Charles Machine Works, including the Ditch Witch brand, initially diluted Professional segment margins but has since delivered "tremendous progress in profitability." This deal gave Toro a leading position in underground construction equipment just as infrastructure spending accelerated. The timing proved fortuitous, creating a growth engine that would later offset residential weakness.

More recently, Toro has sharpened its focus through targeted moves. The first quarter of fiscal 2025 brought ProKASRO Services USA, a UV cured-in-place pipe lining distributor that complements Toro's HammerHead product line. This strengthens Toro's trenchless rehabilitation capabilities, a high-margin niche within underground construction. The company simultaneously divested Pope Products, certain dealers, and most recently the auger boring product line and Trencor brand. These divestitures were immaterial to financials but strategically significant, removing non-core assets to concentrate resources on higher-return opportunities.

The AMP initiative, launched in fiscal 2024, represents Toro's response to a changing environment. Post-pandemic market corrections, two consecutive below-average snowfall seasons, and macroeconomic caution created headwinds that demanded more than incremental cost-cutting. AMP targets $100 million in annualized savings by fiscal 2027 through supply-base transformation, design-to-value engineering, route-to-market optimization, and operational efficiency. By Q3 FY2025, AMP had delivered $75 million in savings and was tracking "well ahead" of target, demonstrating management's ability to execute complex operational change while maintaining growth investments.

Technology, Products, and Strategic Differentiation: The Productivity Playbook

Toro's innovation engine is firing on multiple cylinders, each designed to address specific customer pain points that translate into pricing power. The Ditch Witch W8 Warlock Series vacuum excavator and Toro Grounds Master E3200 fully electric rotary mower launched in fiscal 2024, but the real story is the autonomous and connected solutions debuting in fiscal 2025. The Toro Turf Pro autonomous mower uses GPS RTK technology to maintain up to 18.5 acres with minimal operator input. The Exmark Turf Tracer with XiQ offers a 60-inch cutting deck with robotic operation. The Toro Range Pro golf ball picking robot collects over 15,000 balls in 24 hours.

Why does this matter? Labor availability is the existential challenge facing Toro's customers. When a landscape contractor cannot find workers, equipment that operates autonomously or dramatically improves productivity commands premium pricing. These aren't features; they're solutions to business continuity problems. The Intelli360 digital toolkit and Lynx Drive platform for mobile irrigation control transform equipment from capital assets into data-generating nodes that optimize operations. Toro's exclusive partnership with TerraRad for Spatial Adjust soil moisture sensing software enables real-time moisture mapping and irrigation head adjustments, reducing water consumption while improving turf health.

The underground construction portfolio showcases similar innovation. The JT21 drill and ATJT120 directional drills address the fiber optic buildout driven by data center demand. The W8 hydrovac responds to utility contractors needing safer, more precise excavation. These products don't just meet demand; they create it by enabling work that couldn't be done efficiently before. The electric portfolio—Trakt eDingo and Electric Ultra Buggy—offers eight hours of runtime with zero exhaust emissions, opening indoor construction markets previously closed to gas-powered equipment.

Financial Performance & Segment Dynamics: Margin Expansion as Proof of Concept

The Professional segment's Q3 performance is the financial validation of Toro's strategic pivot. Net sales of $930.8 million grew 5.7% year-over-year, but the earnings story is more compelling. Earnings before income taxes jumped 19.8% to $198.5 million, expanding margins by 250 basis points to 21.3%. Management attributes this to productivity improvements, net price realization, sales leverage, cost savings measures, and lower marketing costs, partially offset by higher material and manufacturing costs.

This margin expansion is not a one-time event. For the nine months ended August 1, 2025, Professional segment earnings grew 12.5% on 2.7% sales growth, expanding margins 170 basis points to 19.45%. The segment is demonstrating operating leverage, where incremental revenue flows disproportionately to the bottom line. Underground construction and golf/grounds solutions are the primary drivers, with order books remaining healthy and secular trends intact. The landscape contractor business grew in Q3 despite muted homeowner demand, proving that professional customers prioritize productivity over economic sentiment.

The Residential segment tells the opposite story. Q3 sales of $192.8 million fell 27.9%, and earnings collapsed 88.7% to $3.7 million, compressing margins to 1.9% from 12.2%. Higher material and manufacturing costs, inventory valuation adjustments, and increased sales promotions created a perfect storm. Yet this performance includes a deliberate strategic choice. Toro is clearing channel inventory, particularly in residential, to position for 2026. The $81.1 million non-cash impairment of the Spartan trade name, while painful, removes a drag on future earnings and signals management's willingness to take medicine today for a healthier tomorrow.

Consolidated results reflect this mix. Gross margin pressure from lower residential volume and higher costs was partially offset by productivity improvements and price realization. Selling, general, and administrative expenses decreased due to cost savings measures. The effective tax rate declined due to the impairment charge and favorable geographic earnings mix. Net earnings per diluted share decreased primarily from the Spartan impairment, but underlying operational performance remains solid.

Outlook, Management Guidance, and Execution Risk

Management's fiscal 2025 guidance reflects strategic realism. Total company net sales are expected at the low end of flat to down 3%, with Professional segment revenue up slightly and Residential down mid-teens. Adjusted diluted EPS guidance of approximately $4.15 sits at the low end of the prior $4.25-$4.40 range. These numbers embed assumptions of normal weather patterns and continued macro caution from homeowners.

The guidance's subtext reveals management's confidence in the Professional segment's durability. Underground construction and golf/grounds businesses are expected to see continued strong demand and stable supply. Year-end backlog is projected to be "substantially reduced" from previous years, returning to a more normal order cycle. For golf and grounds, this means lead times approaching historical norms, while underground construction categories may extend into 2026. This normalization is healthy; it indicates Toro can meet demand without the supply chain constraints that plagued prior years.

The 2026 outlook is where the thesis gets interesting. Management explicitly expects 2026 to be a growth year for the Professional segment, particularly in golf, grounds, underground, and landscape contractor areas. This forward-looking statement, combined with meaningful reductions in residential field inventory, suggests Toro is positioning for an inflection. Channel partners are selling through current stocks, setting up a cleaner foundation for the 2026 spring selling season. If consumer confidence recovers—perhaps triggered by interest rate cuts as management speculates—the Residential segment could surprise to the upside.

Execution risks center on three areas. First, can Toro maintain Professional segment momentum if infrastructure spending moderates? The segment's 21.3% margins create a high bar. Second, will AMP savings continue to offset tariff pressures? Management aims for margin neutrality by year-end, with $45 million in incremental fiscal 2025 tariff impact primarily from steel, aluminum, and China. Third, can Toro manage the residential transition without further margin erosion? The Mexico plant closure and 10% reduction in global salaried workforce in Q2 FY2025 show decisive action, but execution risk remains.

Competitive Context and Positioning: Moats in a Fragmented Market

Toro competes in a fragmented landscape where differentiation determines pricing power. Against Deere & Company (DE), Toro holds distinct advantages in irrigation and snow management that Deere's broader turf line cannot match. While Deere's Small Ag & Turf segment faces 10% sales declines, Toro's Professional segment grew 6% in Q3. Toro's specialized focus on golf courses and municipal maintenance creates deeper customer relationships than Deere's volume-driven approach. However, Deere's scale and precision agriculture technology pose long-term threats if they choose to invest more heavily in professional turf automation.

Stanley Black & Decker (SWK) represents the consumer end of the spectrum. Toro's Residential segment competes directly with SWK's outdoor power tools, but Toro's dealer network and premium brand positioning command higher margins. SWK's operating margin of 9% in Q3 FY2025 lags Toro's consolidated 13.6% margin, reflecting SWK's mass-market exposure. Toro's challenge is maintaining share against SWK's aggressive pricing in home centers while preserving brand equity. The autonomous mower launches and smart connected solutions are Toro's answer, offering features that discount brands cannot replicate.

In underground construction, Toro's Ditch Witch brand competes with CNH Industrial (CNH)'s Case and New Holland compact equipment. Toro's qualitative advantage lies in maneuverability and specialized attachments for urban landscaping, while CNH's construction focus serves heavier applications. CNH's 3.36% operating margin in Q3 FY2025 reflects its exposure to ag cyclicality and tariff pressures, while Toro's U.S.-based manufacturing and USMCA compliance provide insulation. The ProKASRO acquisition strengthens Toro's trenchless rehabilitation capabilities, a niche where CNH has limited presence.

AGCO Corporation (AGCO)'s turf exposure through Massey Ferguson and Fendt brands competes with Toro's zero-turn mowers. Toro's multi-brand leadership in zero-turns—the largest single turf care category—provides scale advantages. AGCO's 6.31% operating margin and exposure to ag destocking make it more vulnerable to cyclical downturns than Toro's balanced portfolio. Toro's irrigation systems and snow attachments offer seasonal diversification that AGCO lacks.

Toro's moats manifest in three areas. First, its dealer and distributor network creates switching costs for professional customers who rely on integrated parts and service. This supports parts/accessories revenue that represents approximately 20% of sales and carries higher margins. Second, proprietary irrigation technology like Spatial Adjust software and Aqua-Traxx Azul drip tape offers 20-30% water savings, creating regulatory compliance advantages and premium pricing power. Third, innovation in snow and ice management provides seasonal cash flow peaks that competitors without dedicated snow lines cannot match.

Valuation Context: Reasonable Multiples for a Transforming Business

At $71.38 per share, Toro trades at a market capitalization of $7.06 billion and an enterprise value of $8.00 billion. The company's valuation multiples sit in the middle of its peer group, but the quality of earnings suggests potential undervaluation. Toro's 21.7x P/E ratio compares favorably to Deere's 26.0x and Stanley Black & Decker's 25.0x, despite Toro's superior margin expansion trajectory. The 12.3x EV/EBITDA multiple is in line with SWK's 12.1x but below CNH's 29.4x, which reflects CNH's cyclical trough earnings.

Cash flow metrics tell a stronger story. Toro's 14.3x price-to-free-cash-flow and 12.0x price-to-operating-cash-flow ratios indicate healthy cash generation. The company's free cash flow conversion guidance of approximately 110% for fiscal 2025 demonstrates that reported earnings translate into real cash. This conversion rate improved from 50% in the prior year, validating the AMP program's impact on working capital and operational efficiency.

Balance sheet strength provides strategic optionality. Toro's debt-to-equity ratio of 0.81 is conservative compared to Deere's 2.46 and CNH's 3.50. The company holds $201 million in cash with $783 million available under its revolving credit facility, providing $984 million in total liquidity. This financial flexibility supports the $290 million in share repurchases year-to-date and a dividend yielding 2.16% with a 45.6% payout ratio.

Toro's 13.6% operating margin and 21.9% return on equity exceed all key peers except Deere, whose larger scale drives higher absolute returns but lower margins.

The valuation appears to be pricing in continued residential headwinds without fully crediting the Professional segment's margin expansion or the potential for 2026 residential recovery. If Toro executes on its guidance and delivers the expected Professional segment growth in 2026, current multiples could prove conservative. Conversely, if infrastructure spending slows or consumer confidence fails to recover, the valuation provides reasonable downside protection through the dividend yield and cash generation.

Conclusion: A Professional Powerhouse Waiting for Residential Recovery

Toro's investment thesis centers on a successful strategic pivot toward Professional segment dominance while managing through a residential cyclical trough. The Professional segment's 250 basis points of margin expansion in Q3, driven by underground construction and golf/grounds momentum, demonstrates Toro's ability to generate superior returns in niche markets where productivity matters more than price. The AMP initiative's $75 million in savings, tracking well ahead of its $100 million target, provides a self-funding mechanism for innovation and tariff mitigation that competitors lack.

The Residential segment's challenges are real but temporary. The 27.9% sales decline and margin compression to 1.9% reflect macroeconomic headwinds, not structural share loss. Management's aggressive inventory clearing, footprint rationalization, and the $81.1 million Spartan impairment create a cleaner foundation for 2026 recovery. When consumer confidence returns—potentially triggered by interest rate cuts—the segment's normalized 8-10% margins could provide meaningful earnings leverage.

Two variables will determine whether this thesis plays out. First, can Toro maintain Professional segment momentum and margins if infrastructure spending moderates? The segment's 21.3% margins create a high bar, but order books remain healthy and secular trends are intact. Second, will residential channel inventory clearing translate to demand recovery in 2026? The meaningful reduction in field inventories positions Toro well, but timing depends on factors outside management's control.

Trading at reasonable multiples while generating superior cash conversion, Toro offers investors exposure to infrastructure tailwinds and a potential residential recovery without paying a premium. The company's century-long history of adaptation, combined with the AMP initiative's early success, suggests management can navigate the current transition. For investors willing to look through near-term residential noise, Toro's Professional-led transformation could drive sustained earnings growth and multiple expansion as the story plays out.