Buy Scotts Miracle-Gro Stock. It’s a cheap cannabis store with room to grow.
Scotts Miracle Gro
has a dominant franchise in the consumer lawn and garden market, and it owns a fast growing hydroponics business that primarily caters to the marijuana industry.
A beneficiary of the stay-at-home trend during the pandemic, Scotts (ticker: SMG) saw its stock drop by more than 40%, from an April high to $ 146 recently. Investors are worried about declining consumer demand in 2022 and tighter profit margins.
Still, the stock looks cheap, trading for 17 times the projected earnings of $ 8.61 per share during the company’s year ending September 2022. The dividend yield is 1.8%.
“Scotts has a fantastic consumer franchise,” says Jon Boyar, director of Boyar Value Group, which owns the shares. “During the current course of action, you are effectively getting hydroponic activity for free.” He values the two companies at over $ 200 per share.
A split of the companies would likely increase the share, but the company said it was not interested in such a move at this time. “It could get to the point where strategically it makes more sense,” said Jim King, public relations and investor manager at Scotts.
|Recent price||$ 146.00|
|Modification of the current fiscal year||-26.7%|
|Market value (bill)||$ 8.1|
|2021E EPS||$ 9.20|
|2022E BPA||$ 8.61|
|2021E P / E||15.9|
|2022E P / E||17.0|
|Net debt (in billions)||$ 2.1|
|Top Holder||Hagedorn family (26%)|
Note: the fiscal year ends in September. E = estimate
Sources: Bloomberg; corporate reports
It would be difficult for activists to target Scotts and try to force the breakup, as the Hagedorn family controls around 26% of the shares. Scotts has a market value of $ 8.1 billion, plus $ 2.1 billion in net debt.
“We believe the stock has overcorrected and as a result we are likely to step up our share buybacks,” King said. The company has a repurchase authorization of $ 750 million and has allocated $ 250 million for the next few months.
Its brands, like Turf Builder Lawn Fertilizer and Miracle-Gro Plant Nutrients, have market shares ranging from the mid-1940s to mid-1960s, better than
Scotts received a huge boost during the pandemic as about 20 million U.S. households took care of lawns and gardened or resumed these activities. The company has estimated that around 75% of these households will remain loyal.
“Everyone was stuck at home and staring out the window at their lawn with stimulus checks in hand,” said Joe Altobello, analyst at Raymond James. “It’s no surprise that millions of households have fallen into the category. It has a strong buy rating and a target price of $ 200 on the stock.
As millennials embrace homeownership, it creates a new generation of Scotts customers, and they are entering gardening and lawn care at higher levels than baby boomers, according to the company. Another advantage is the migration of Americans to the Sun Belt, where the growing season is longer than in the Northeast or Midwest.
On an earnings conference call in August, CEO Jim Hagedorn noted that Scotts “saw nearly a decade of growth in one year” in its consumer business during the fiscal year ended September 2020, while sales increased by 24% against an average of 2% per year over the previous 10 years.
The company expects sales growth of 7-9% for the consumer business in the current fiscal year ending September 30, but expects a “slight decline” in the coming year. Hagedorn said. Longer term, the company sees annual sales growth of 2-4% in the division.
Andrew Carter, an analyst at Stifel, sees Scotts delivering double-digit annual profit growth after earnings normalize in fiscal 2022. The stock, he argues, looks cheap, trading at a discount of ‘about 13% compared to the basic consumer group.
The stock’s weakness reflects a deterioration in the outlook for near-term earnings. The company’s earnings are expected to drop to $ 8.61 per share in fiscal 2022, from an estimated $ 9.20 per share for the current year.
Inflation in commodities like resin and urea is weighing on margins, which have fallen by five percentage points in the last quarter. Scotts increased prices an average of 5% in August to offset increases in raw materials and may see further increases.
Without potential catalysts until the spring 2022 planting season, some investors see little reason to buy now, Altobello says.
In 2015, Scotts started a hydroponics business that sells lighting, nutrients, and other products, primarily to marijuana growers who favor controlled greenhouse conditions. (Hydroponics doesn’t involve soil.) The division, called Hawthorne, is now the industry leader by a large margin, enjoying 60% sales growth in the nine months ended June , at $ 1.1 billion, or about 25% of total revenue. .
Hawthorne’s growth, however, is expected to be slow, in the zero to 15 percent range, over the current period due to an oversupply of marijuana in California, which accounts for roughly half of Hawthorne’s sales.
Still, Hawthorne’s multi-year outlook looks strong, as only 18 states have legalized recreational use of marijuana by adults – it remains illegal at the federal level. Altobello sees sales growth of 15% in the next fiscal year and 10% to 15% per year in the longer term.
Hydrofarm Holdings Group
(HYFM), the second largest player in hydroponics, is less than half the size of Hawthorne and is valued at $ 1.8 billion, more than 40 times the estimated profits of 2021. Altobello values Hawthorne at over $ 4 billion.
It is unusual to find a company like Scotts with two large consumer-focused companies that have favorable demographics and whose stocks are trading below 20 times future earnings.
These are the seeds of what could be a growth story for investors.
Write to Andrew Bary at [email protected]