Quick: Think of an industry that offers a higher long-term growth rate than legal marijuana. Can't think of one, can you? And that's why investors have been flocking in droves to marijuana stocks over the past year and change. In many instances, marijuana stocks with market caps north of $200 million have doubled or tripled in value over the trailing year.
We certainly don't have to look very far to find figures that support investors' optimism. Marijuana Business Daily's recently released a report entitled "Marijuana Business Factbook 2017." It calls for roughly 30% legal sales growth in 2017, approximately 45% next year, and an estimated 300% aggregate growth between 2016 and 2021 to north of $17 billion in legal U.S. sales. If investment firm Cowen & Co.'s $50 billion in legal sales by 2026 prediction is correct, it implies annualized industry growth of more than 23%. It's no wonder that businesses are clamoring for ways to be part of the "green rush."
This well-known household brand just cut its profit forecast
Though there are a number of direct players in the industry, some of the most surprising growth can be seen in emerging industry players. One such name is Scotts Miracle-Gro (NYSE:SMG), a company that's well known for its brand-name lawn and garden products.
Last week, Scotts Miracle-Gro updated its full-year sales and profit outlook, cutting both in the process. What had once been a forecast for sales growth of 6% to 7% and $4.10 to $4.30 in adjusted full-year earnings per share has dropped to sales growth of 3% to 4% and $4.00 to $4.20 in full-year EPS. Said CEO Jim Hagedorn:
Despite the challenging weather that has plagued the Midwest and Northeast nearly all spring, consumer purchases of our products were up slightly at home center, hardware, and gardening stores entering June. However, performance at mass retail is down more than 10 percent from last year due to changes in merchandising strategies and tighter inventory management.
While we still have 30% of the season in front of us, it's become clear that we'll fall short of our original plans on both the top and bottom line. The contingency plans we've put in place will help partially offset the sales shortfall we've seen thus far, but we are unwilling to cut too deeply if the impact begins to affect our planning for next season.
On the surface, Hagedorn's commentary doesn't sound very encouraging. And normally when publicly traded companies lower their outlook, they're greeted with a drubbing by Wall Street. However, that's not what happened. In fact, Scotts Miracle-Gro added $356 million in market value the day it announced this "warning."
How is this possible? Look no further than the company's emerging division focused on the marijuana industry.
Scotts is aiming to become a primary player in hydroponics
According to the press release, the company's Hawthorne Gardening unit -- the subsidiary that houses the company's hydroponics operations for the legal marijuana industry -- were up by 17% on a year-over-year basis entering the month of June. Hawthorne currently houses brand names that include Gavita, AeroGrow, and General Hydroponics, all of which have been exhibiting double-digit sales growth. The sales leap in Hawthorne appears to have been more than enough to lift Scotts' share price by nearly $6 in a single trading session.
The release also notes that a new acquisition within the Hawthorne Gardening unit and in its core business is expected to tack on $0.05 to $0.07 in EPS on an annualized basis.
Right now, hydroponics only comprises around 10% of Scotts Miracle-Gro's annual sales. However, with the legal weed industry seemingly capable of 20% to 30% annual growth, hydroponics could continue to see significant growth. And there's arguably no name in the lawn care and gardening industry that's more well-known than Scotts. If cannabis growers want to improve crop yield, then soil, nutrients, and lighting solutions from Hawthorne Gardening may contain the answer.
What's more, Hagedorn has previously implied that growth in hydroponics could continue to exceed expectations considering that some of its pot-based acquisitions have been delayed. Hagedorn suggested in early May that buyouts of smaller, family-owned businesses have been a logistical challenge, but that these acquisitions should close by the end of this fiscal year. This could, in turn, boost sales growth even higher.
Jeff Sessions is the proverbial lawnmower man
However, Scotts Miracle-Gro doesn't have a guaranteed path to success, even if its hydroponic sales growth would suggest otherwise. A bigger issue remains what the Trump administration and Attorney General Jeff Sessions might do with the legal weed industry.
The Obama administration had a very hands-off approach to federal regulation. It ceded the responsibility of regulation to the states that approved medical and/or recreational weed. But White House press secretary Sean Spicer indicated in February that the current administration was planning to tighten up those lax policies. While Spicer didn't exactly expound on what he meant by such a statement, it was enough to create worry within the industry, especially for recreational marijuana-based businesses.
Sessions is a particularly hardened opponent of marijuana's expansion. He has commented on numerous occasions that he doesn't believe marijuana is medicine, and he recently asked Congress for permission to prosecute medical marijuana businesses. While it's unlikely that Sessions is going to get everything he asks for, his mere influence on the president could roll back some of the progress that's been had by the industry in recent years.
Scotts Miracle-Gro is counting on continued expansion of legal weed in the United States. With only eight states having legalized recreational pot, there's a major opportunity for legal grow operations to pop up in new states and for Scotts to find a number of new business and residential customers.
Ultimately, the growth potential is enormous for hydroponics, as is the risk if the Trump administration cracks down on the marijuana industry. But at least investors choosing to buy into Scotts Miracle-Gro can take solace in the fact that, unlike other marijuana stocks, they have a legitimate business to fall back on (lawn and garden) should things not work out for the legal pot industry.