This company’s expertise in specialty fertilizers, “grow lighting” and other supplies for hydroponics should help grow sales as more U.S. states legalize cannabis. The stock trades at 21.5 times its 2019 earnings forecast while offering investors a 2.4% yield.
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Scotts Miracle-Gro Company, $90.12, symbol SMG on New York (Shares outstanding: 55.4 million; Market cap: $5.0 billion; www.scottsmiraclegrow.com) manufactures, markets, and sells consumer lawn and garden products worldwide. In the past few years, Scotts has sold most of its foreign operations to focus on the U.S.
In 2013, the company’s CEO Jim Hagedorn decided to branch out into offering products for marijuana growers.
Since then, Scotts has made numerous acquisitions of leading companies providing specialty fertilizers, “grow lighting” and other supplies for hydroponics; that’s the indoor method of growing cannabis favoured by U.S. and Canadian producers.
Right now, hydroponics (through Scotts’ Hawthorne division) represent roughly 12% of the company’s sales, but those sales should rise as more U.S. states legalize cannabis.
As well, Scotts recently acquired Sunlight Supply Inc., the top U.S. distributor of hydroponics products, for $458.6 million. Scotts will now serve 1,800 hydroponic retailer customers in the U.S.—Sunlight has nine distribution facilities across North America. The company expects its efforts to eliminate overlapping operations will cut $30 million from its annual costs in its 2019 fiscal year.
Scotts’ sales rose 21.7%, from $2.19 billion in 2014 to $2.66 billion in 2018 (fiscal years end September 30).
Earnings jumped 39.6%, from $170.0 million in 2014 to $237.4 million in 2017. Earnings per share gained 44.9%, from $2.72 to $3.94, on fewer shares outstanding. However, earnings declined to $3.71 a share (or a total of $211.6 million) in 2018. That’s mainly because unfavourable weather conditions hurt demand for its lawn and garden products.
In its fiscal 2019 second quarter, ended March 30, 2019, Scotts’ sales rose 17.4%, to $1.19 billion from $1.01 billion a year earlier. That gain was mainly due to the acquisition of Sunlight Supply. Strong U.S. consumer demand for lawn and garden products also contributed to the higher sales.
If you disregard costs to integrate Sunlight Supply and other unusual items, the company’s earnings jumped 30.9% to $203.2 million from $155.2 million a year earlier. Due to more shares outstanding, earnings per share gained 26.4%, to $3.64 from $2.88.
During the quarter, Scotts sold its 30% stake in a joint venture with lawn care provider TruGreen for a gain of $259.8 million. The company used that cash to pay down its debt.
As of March 30, 2019, the company’s long-term debt was $2.04 billion. That’s a high, but manageable 41% of its market cap. Scotts also held cash of $37.5 million.
In April 2019, Scotts sold its interest in a joint venture with chemical and seed maker Monsanto to that firm’s new parent company, Germany’s Bayer AG. It received $37 million for that stake. The company plans to apply that cash to its debt.
Scotts is also the exclusive distributor of the consumer version of Roundup weed killers (made by Monsanto) in the U.S. and Canada. A California jury recently awarded $289 million (later reduced by the judge to $78 million) to a man who claimed that Roundup weed killer caused his cancer.
Bayer plans to appeal the ruling. However, it faces over 13,000 similar lawsuits from farmers, gardeners and landscapers.
Despite those lawsuits, Scotts’ sales of Roundup jumped 20% from the same quarter a year earlier. That’s partly because it launched a new advertising campaign to boost sales. Bayer recently paid $20 million to reimburse Scotts for the increased ad spending.
If Bayer has to stop making Roundup, that would have little impact on Scotts. Those products account for just 5% of the company’s total sales.
Scotts expects to earn between $4.10 and $4.30 a share for all of fiscal 2019. The stock trades at 21.5 times the midpoint of that range. The $2.20 dividend yields 2.4%.
Even if the acquisition of Sunlight Supply fails to live up to expectations, the outlook for Scotts’ main business remains bright. The improving U.S. economy and consumer confidence should prompt homeowners to spend more on their lawns. The company also continues to devote roughly 2% of its sales to research. It’s particularly interested in developing environmentally friendly products such as organic fertilizers.
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