A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that distributes hydroponics equipment and supplies for agriculture.
Pat likes the firm’s track record of rising sales. It also has a solid balance sheet as it looks to cash in on growing cannabis legalization. However, Pat notes that the company has been growing rapidly by acquisition, which carries a special set of risks.
Hydrofarm Holdings Group Inc. (Symbol HYFM on Nasdaq; www.hydrofarm.com), is a leading distributor of hydroponics equipment and supplies for controlled environment agriculture. That includes the indoor growing of cannabis. The company’s exclusive products span the lighting, climate control, nutrient, and growing-media categories.
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Hydrofarm first sold shares to the public and began trading on Nasdaq at $20.00 a share on December 10, 2020.
The company continues to grow by acquisition.
On August 3, 2021, Pennsylvania-based Hydrofarm completed the purchase of Greenstar Plant Products, a Canadian producer of horticultural nutrient products under the Grotek and Gaia Green brands. Its customers range from home gardeners to large commercial operators such as landscapers, greenhouses, nurseries, and so on. Hydrofarm paid $83 million for the company.
In 2021, Greenstar expected to generate $26 million in sales, 50% higher than in 2020.
Greenstar was Hydrofarm’s fourth acquisition in 2021. Up until that point, its other three acquisitions were Oregon-based Aurora Innovations and California-based nutrient brands Heavy 16 and House & Garden.
Then, on November 1, 2021, Hydrofarm paid $58 million for Illinois-based Innovative Growers Equipment Inc. That firm makes horticulture benches, racks, and LED lighting systems. It was expected to generate $48 million in sales in 2021.
The purchase price for Innovative Growers consisted of $46.4 million in cash and $11.6 million in Hydrofarm stock. It was Hydrofarm’s fifth acquisition of 2021.
The company’s revenue in 2020—its first year as a public company—rose 45.6%, to $342.2 million from $235.2 million in 2019. Revenue then rose 40.1% in 2021, to $479.4 million. Excluding one-time items, Hydrofarm made $7.3 million, or $0.21 a share, in 2020. That’s compared to a loss of $22.6 million, or $0.68 a share, in 2019. The company then made $25.4 million, or $0.59 a share, in 2021.
Hydrofarm holds cash of $26.4 million—but its long-term debt of $119.0 million is a very high 93% of its currently depressed market cap. That adds risk.
Growth by acquisition also adds risk, but so far, the company’s purchases have fit in well with its current operations.
Meanwhile, the stock offers investors a way to profit as cannabis use continues to grow in the U.S. and globally. As a result, investors in the company benefit from growing legalization without having to pick investment winners from the industry’s producers and retailers.
Recommendation in Pat’s Inner Circle: Hydrofarm Holdings Group Inc. is a hold, but only for highly aggressive investors.
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