What happened
Shares of Scotts Miracle-Gro (SMG -0.09%) rose 10% in June, according to data provided by S&P Global Market Intelligence. That continues a yearlong trend that led to an impressive stock advance of about 60% through midyear. While a general market advance is surely a piece of the puzzle here, it isn't the whole story. An early June news release updating the company's guidance helps explain why Scotts' performance in the first half of 2019 was more than three times that of the S&P 500 Index.
So what
In November 2018, while announcing fiscal 2018 earnings, Scotts projected that it would see an earnings advance of 10% to 11% in fiscal 2019.
That was built on two platforms. The company's core lawn-care segment was expected to provide 1% to 2% growth, which is reasonable for this mature business. Its Hawthorne segment, meanwhile, was projected to chip in 8% to 9% growth. Hawthorne is a relatively new segment for Scotts, focused around hydroponic gardening. Management is specifically looking to serve the marijuana market through this division.
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The company reaffirmed its guidance when it releases fiscal first- and second-quarter results in January and May. But in early June, it provided an update prior to earnings that it was now looking for growth of 13% to 14% in fiscal 2019. That update was driven by strength on both sides of the business. Lawn care's growth was updated to 3% to 4%, while Hawthorne's growth was increased to 12% to 15%.
This is wonderful news for Scotts, since the Hawthorne business didn't have the best year in 2018. Sales were down notably when excluding acquisitions, suggesting that it wasn't gaining the traction it had hoped for in the marijuana space. But the strong showing in fiscal 2019 appears to be proving that management's long-term thesis is correct. Investors are reacting accordingly and pushing the shares higher.
Now what
Building the Hawthorne business has meant a significant increase in debt on Scotts' balance sheet. So far, it has been able to handle the weight, but it is something that investors need to watch carefully. It increasingly appears to be on the right track, and investors who want some exposure to marijuana but don't want to own a grower should probably be taking a look here.
