Better Buy: Scotts Miracle-Gro vs. Corteva Agriscience

These two companies operate in different parts of the global agriculture industry. Which is a better choice for investors today?

Lou Whiteman
Lou Whiteman
Jun 24, 2019 at 9:50PM
Industrials

Humans have been trying to make plants grow since the beginning of time, and modern farmers and gardeners have it much easier than it was in past generations thanks to the work of companies such as Scotts Miracle-Gro and Corteva Agriscience.

Although Scotts and Corteva cater to different areas of the global agriculture industry, they both specialize in chemicals and other products designed to improve plant performance and protect them from pests and other vulnerabilities. Both have solid, established businesses to rely on, and investors in both can hope that demographic or political trends will help fuel growth in the years to come.

Company

2018 Revenue

2018 EBITDA

Market Cap

Corteva Agrisciences (NYSE:CTVA)

$14.3 billion

$2.7 billion

$20.37 billion

Scotts Miracle-Gro (NYSE:SMG)

$2.66 billion

$482 million

$5.42 billion

Data sources: Yahoo! Finance, company filings. Data as of June 21, 2019.

Weekend gardeners are more likely to pick products from Scotts Miracle-Gro, while commercial farmers would lean toward Corteva. But which company is a better pick for investors? Here's a deep dive into the two businesses to determine which is a better buy today.

A brand-new industry leader

Corteva is a collection of well-established businesses under a new corporate banner and stock symbol. The company was formerly the agricultural units of DowDuPont, formed through a 2018 chemicals industry megamerger and spun out as an independent in early June.

The company is focused on the commercial agriculture industry, operating in more than 130 countries and generating about half of its revenue from crop protection and half from seeds. It's an important industry for a growing world, with technologies from Corteva and its rivals seen as the key to generating ever higher yields needed to feed a growing global population.

A jar full of coins sprouting a young plant.

Image source: Getty Images.

But for all the long-term promise, Corteva has a troubled recent history. Unit revenue fell throughout 2018, leading then-parent DowDuPont last October to take a massive $4.6 billion impairment charge. Bad weather and a poor planting season were partially to blame, with those issues compounded by declines in corn and soybean planting acreage exacerbated by the ongoing U.S. trade war with China and a corresponding fall in demand for soybeans.

This year hasn't been much better, with farmers, and their suppliers, stung by flooding in the Midwest that has limited corn planting. No surprise Corteva's introduction to public markets has been shaky. Shares traded at $32 apiece on a "when-issued" basis leading up to the spinoff, but as of June 21 they traded 14% below that price.

Year to year, season to season, the agriculture business can be volatile, but the underlying demographic trends are in Corteva's favor. The company has targeted long-term sales growth of 3% to 5% annually, including annual organic sales growth of 1% to 2% above the market in seeds and 1.5% to 2.5% above the market for crop protection.

Seeing green from cannabis

Scotts Miracle-Gro is best known for its consumer lawn and garden products, and as the owner or marketer of brands including Ortho lawn treatment products, Roundup weed killer, and Tomcat rodent control, as well as the grass seeds and plant fertilizer products for which it gets its name.

That's a steady but not spectacular business, which tends to ebb and flow with the seasons. What has investors excited, and the stock up 58% year to date, is its emerging role as a lead supplier to the U.S. cannabis industry. A series of acquisitions by Scotts' Hawthorne Gardening subsidiary has made the unit a top supplier of hydroponics, fertilizers, and lighting systems.

A lawn mower cuts a path through a lawn.

Image source: Getty Images.

Hawthorne was a driving force behind Scotts Miracle Gro's better-than-expected fiscal second-quarter results announced in late April. Scotts beat estimates on both revenue and earnings, with Hawthorne revenue up 245% year over year. Much of that was thanks to the company's 2018 acquisition of Sunlight Supply, but Hawthorne revenue was still up 21% from a year prior, even without Sunlight's contribution.

Scotts Miracle-Gro through Hawthorne is positioned to be the fertilizer that grows the nascent marijuana industry. California is the big prize for now, accounting for more than half of Hawthorne's total revenue, but assuming the trend toward liberalized state laws on marijuana use continues, Hawthorne should have plenty of opportunities to grow.

The bull case for Scotts Miracle-Gro is in part that the company is an uncontroversial, incumbent-driven way to profit from the growth of the marijuana business, without taking on the uncertainty of an emerging industry. In that sense it's similar to how United Parcel Service and FedEx were once seen as less risky backdoor ways to profit from the early days of the e-commerce boom.

The better buy is...

Corteva's off to a rocky start, but there is a lot to like about the company over the long term. Now that it's finally on its own after nearly two years of corporate reshuffling, company management should find opportunities to streamline operations, and its powerful R&D arm is expected to churn out new products in the years to come. Patient, long-term investors able to block out near-term headline risk and focus on the long term should do well owning Corteva.

That said, for a growth-oriented investor, Scotts Miracle-Gro is the better buy today. The company has a strong foundation with its lawn and garden business, and a potential blockbuster in its Hawthorne unit. A bet on Scotts Miracle-Gro today is largely a bet that U.S. state marijuana laws, and eventually even federal laws, will continue to loosen. As dangerous as it is to speculate on politics, that seems like a pretty good bet.

At worst, Scotts Miracle-Gro looks like a stable consumer supplier, with an attractive 2.25% dividend yield. At best, Scotts Miracle-Gro could be one of the big winners from the cannabis revolution. Corteva is an intriguing long-term investment, but for most investors, Scotts Miracle-Gro is the better buy.