Here's Why The Scotts Miracle-Gro Company Stock Dropped 10.8% in May

A surprisingly poor performance in the most recent fiscal quarter put investors in a sour mood.

Maxx Chatsko
Maxx Chatsko
Jun 6, 2017 at 12:49PM
Energy, Materials, and Utilities

What happened

Shares of consumer lawn and garden care specialist The Scotts Miracle-Gro Company (NYSE:SMG) fell nearly 11% last month after the company reported quarterly earnings that were well below what investors were expecting. Compared to the year-ago period, fiscal second-quarter 2017 revenue and EPS were down, the latter sharply, with no growth from purchases at U.S. retailers, which are by far the largest source of revenue for the company.

Several growth projects and business units did manage to report impressive year-over-year growth. The allowed the company's "other" segment to eclipse the European consumer segment as the second-largest. That will be the case no matter what pretty soon since Scotts Miracle-Gro announced that it will sell its European and Australian businesses for approximately $250 million in 2017 to focus more bandwidth on the all-important American market. Unfortunately, that wasn't enough to convince Wall Street that operations were on the right track. 

A person gardening.

Image source: Getty Images.

So what

The quarterly results weren't all bad. Management was actually expecting a "difficult comparison" for the first six months of the fiscal year compared to last year, partially due to a very strong period from 2016. Some of the good news is that the "other" segment grew 50% compared to the year-ago quarter. That was driven by a strong showing for the company's hydroponics business, which grew 22% alone.

So what spooked analysts? Quarterly EPS dropped 25% from the year-ago period, mostly due to the timing of several asset sales. Total revenue declined only 3% during the comparison period. The scariest thing might be what management said about the divestiture of the European business.

SMG Chart

SMG data by YCharts.

Scotts Miracle-Gro will net roughly $150 million in cash from the sale, but it will result in earnings dilution of about $0.20 per share in fiscal 2017. That's more than originally expected when plans to sell the unit were announced earlier in the year. Management expects to use the windfall to invest in acquisitions and share repurchases, hopefully negating the dilution, but Wall Street is dealing with the first bit of uncertainty surrounding the stock after an explosive 55% gain in 2016.

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Now what

The stock's 11% drop in May seems to have more to do with investors locking in gains from a great run last year than it does with waning confidence in the long-term prospects for the business. A $0.20-per-share hit from the sale of the European business is more than originally expected, but it's a small fraction of the original full-year 2017 guidance range of $4.10 to $4.30. In other words, last month's share-price movement is much ado about nothing for long-term investors.