Is Scotts Miracle-Gro the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Scotts Miracle-Gro (NYSE: SMG  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Scotts Miracle-Gro.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

3.4%

Fail

 

1-Year Revenue Growth > 12%

2.8%

Fail

Margins

Gross Margin > 35%

36%

Pass

 

Net Margin > 15%

6.1%

Fail

Balance Sheet

Debt to Equity < 50%

104.4%

Fail

 

Current Ratio > 1.3

1.91

Pass

Opportunities

Return on Equity > 15%

21.5%

Pass

Valuation

Normalized P/E < 20

16.09

Pass

Dividends

Current Yield > 2%

2.7%

Pass

 

5-Year Dividend Growth > 10%

14.9%

Pass

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With six points, Scotts Miracle-Gro looks pretty healthy. But the company's tepid growth figures continue to pose a threat to its long-term prospects.

Anyone who has a lawn is probably familiar with Scotts. The company makes a variety of fertilizers, insecticides, and other products designed to help people grow plants while controlling weeds and pests. Scotts also serves commercial nurseries and greenhouses, as well as growers of specialty crops.

One thing that puts a limit on growth and margins is the fact that unlike commercial fertilizer makers like PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) , Scotts caters to ordinary consumers and therefore relies on retailers to sell its products. In particular, Home Depot (NYSE: HD  ) , Lowe's (NYSE: LOW  ) , and Wal-Mart (NYSE: WMT  ) accounted for nearly two-thirds of its revenue in 2010. With the retail market generally slow, it's hard for Scotts to find new growth.

That has pushed the company in unusual directions. For instance, perhaps the most interesting piece of news from this company came in June, when CEO Jim Hagedorn said he wanted to target the medical marijuana market.

Scotts definitely needs to find growth however it can. Earlier this week, the company said that its full-year earnings would come in below expectations, due to Hurricane Irene and other weather events during September.

In the end, Scotts needs a solid recovery from consumers. If it gets it, then the company can start working on reducing its debt and making a real run at perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click here to add Scotts Miracle-Gro to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Wal-Mart. Motley Fool newsletter services have recommended buying shares of Home Depot, Lowe's, and Wal-Mart, as well as creating a diagonal call position on Wal-Mart and writing covered calls on Lowe's. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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