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Better Marijuana Stock: Scotts Miracle-Gro vs. Organigram Holdings

By Keith Speights - May 28, 2018 at 8:18AM

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Which stock wins in a match-up between a major supplier to the marijuana industry and an up-and-coming marijuana grower?

On the surface, Scotts Miracle-Gro (SMG 0.10%) and Organigram Holdings (OGI -2.15%) have very little in common. Scotts is a big supplier of lawn and garden products with a market cap of more than $4.7 billion. Organigram is a small Canadian marijuana grower with a market cap barely one-tenth the size of Scotts Miracle-Gro.

But Scotts Miracle-Gro and Organigram have at least one thing in common: They're both marijuana stocks. It's obvious how Organigram fits the bill, but Scotts merits the label thanks to its Hawthorn Gardening Company subsidiary, which is a go-to supplier for the marijuana industry.

Which of these two marijuana stocks is the better choice for investors? Here's how Scotts and Organigram compare.

Marijuana plants growing indoors

Image source: Getty Images.

The case for Scotts Miracle-Gro

Scotts Miracle-Gro is organized into three business segments, so it makes sense to look at each of them separately to assess the merits of buying the stock. The biggest segment, by far, is the U.S. consumer business, which generates nearly 91% of Scotts' total revenue. 

If you only looked at the company's Q2 results announced on May 1, you might think the U.S. consumer business is struggling. Sales dropped 6% year over year -- but there's more to the story. The sluggish sales resulted from a late start to the lawn and garden season due to an abnormally cold spring in much of the U.S.

Over the long run, however, Scotts Miracle-Gro should be well-positioned for success in this segment. The company's brands are household names and Scotts continues to launch innovative new products. And if longer-range climate change predictions become reality, warmer weather should increase demand for the company's lawn and garden products.

Scotts' "other" business segment markets lawn and garden products in international markets, and this business currently contributes around 5% of total revenue. The segment's long-term prospects should be good for the same reasons as Scotts' U.S. consumer business.

That leaves the Hawthorne segment, which markets hydroponic gardening products and lighting systems. Although the Hawthorne business saw Q2 sales fall from the prior-year period, it should be Scotts' biggest growth driver in the future. Hawthorne's sales slipped mainly due to California working out the kinks in its policies for regulating recreational marijuana.

Scotts is doubling down on its bet on the U.S. marijuana industry's growth, though. In April, the company announced that it was buying Sunlight Supply, the largest distributor of hydroponic products in the U.S., for $450 million. If the marijuana industry expands in the U.S. and Canada, Scotts Miracle-Gro should be a key beneficiary.

On top of the potential growth that the company could see in coming years, Scotts also offers something else that investors should like -- a solid dividend. The dividend currently yields 2.43%. With a payout ratio of 52%, Scotts appears to be in good position to keep those dividend checks flowing.

The case for Organigram

Organigram offers a more direct way to invest in the marijuana industry. The company's entire business is focused on growing and selling marijuana products.

It's important to note that Organigram's sales right now are very small. The company reported fiscal Q2 revenue totaling 3.2 million Canadian dollars (roughly $2.5 million) in April. However, business is booming. Not only was that sales figure a record high for Organigram, the company also posted an all-time high profit of CA$1.1 million (around $840,000).

What's even more important are Organigram's opportunities to grow by leaps and bounds. Canada is on course to legalize recreational marijuana this summer and the combined medical and recreational marijuana market in the country could top $10 billion within the next few years. Organigram only has to capture a small share of this market to enjoy tremendous revenue growth.

The company also is looking to capitalize on international opportunities. Organigram announced earlier this month that it plans to buy up to 25% of Alpha-Cannabis Germany, a move that should enable it to gain a foothold in the fast-growing German medical marijuana market.

Organigram has been scrambling to beef up its production capacity to meet increased demand and has a multi-phase expansion project underway. It expects to be able to produce over 65,000 kilograms of cannabis annually by April 2019. Its annual production capacity should increase to 113,000 kilograms by April 2020.

Better marijuana stock

Which is the better marijuana stock? I think it depends on how big of a risk taker you are.

If you'd like to dip your toes in the water with investing in the marijuana industry, Scotts Miracle-Gro is the better choice as it should benefit nicely from the expansion of the marijuana market. However, the company's primary source of revenue will remain in lawn and garden products for a long time to come.

On the other hand, if you're willing to trade high risks for the potential of high rewards, Organigram could be right up your alley. With the anticipated legalization of recreational marijuana in Canada and increased global demand for medical cannabis, I think Organigram is poised to see its sales skyrocket.

My colleague Sean Williams has referred to Organigram as "the only marijuana value stock." While Sean is right that the stock appears more attractively valued than other Canadian weed stocks, keep in mind that an enormous amount of growth is baked into Organigram's share price. Scotts isn't cheap, but its forward earnings multiple of 18 isn't astronomically high.

I'd be remiss if I didn't point out one possibility that could warrant a closer look at Organigram. In my opinion, more consolidation in the Canadian marijuana industry is coming. Organigram could be one of the top acquisition targets for larger marijuana growers in the not-too-distant future.

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Stocks Mentioned

The Scotts Miracle-Gro Company Stock Quote
The Scotts Miracle-Gro Company
$80.26 (0.10%) $0.08
OrganiGram Holdings Stock Quote
OrganiGram Holdings
$0.92 (-2.15%) $0.02

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