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Why Did Scotts Miracle-Gro Climb 21% in April?

By Anne Burdakin - May 6, 2020 at 4:30PM

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Everything's coming up roses at Scotts Miracle-Gro this spring.

What happened

Scott's Miracle-Gro (SMG -6.22%), one of the world's biggest companies for lawn and garden care, popped 21.1% in April, according to data from S&P Global Market Intelligence. The company's best-in-class brands include Scotts, Miracle-Gro, and Ortho, and it has a wholly owned subsidiary in Hawthorne Gardening, an indoor farming and hydroponics company.

While it's hard to know yet, some perceive the company as being immune to the coronavirus crisis, which didn't really affect lawn and garden care. The company is also growing from exposure to the booming legal marijuana growing industry in North America.

So what

At the end of March, Scotts announced preliminary results for its second fiscal quarter. It said demand across the board for products had surged in recent weeks, especially in categories focused on edible gardening, professional growing, and pest control.

For its second quarter of 2020, the company forecast an increase in overall sales of approximately 16% over the year-ago quarter. U.S. consumer segment sales are expected to gain approximately 12%, while Hawthorne sales are also expected to gain, conservatively, 55% for the quarter.

Aerial view of a landscaped yard, with a wheelbarrow filled with soil, a hose, and a watering can.

Image source: Getty Images.

Hydroponic techniques, indoor farming, and the marijuana industry in particular have the potential to boom for decades to come. Fortunately for Scotts, Hawthorne Gardening is positioned as the go-to resource for indoor and marijuana farming.

"Demand in nearly all areas of the business has surged in recent weeks and we have benefited as a result," said Randy Coleman, executive vice president and chief financial officer.

The rosy preliminary results, along with announcement of the regular dividend payment, drove the stock price higher in April.

Now what

Scotts' performance is as positive as management forecast. Second-quarter 2020 earnings were revealed a $4.50-per-share performance, beating Wall Street's consensus of $3.50 per share for an upside surprise of 29%.

Demand surged, too, resulting in 11% sales growth in the U.S. consumer segment, and 60% sales growth in Hawthorne. U.S. consumer profits were up 17%, and Hawthorne's rose 148%.

Scotts' price-to-earnings ratio of 15 is well below the sector average of 25, indicating that the stock is undervalued. On the other hand, the price-to-sales ratio is 1.85, above the sector average of 0.70.

I would argue that Scotts Miracle-Gro is no average company, sitting right in the sweet spot of demand for new techniques in hydroponics and indoor farming. The stock market has been wild lately, but Scotts has growing market demand with proven resilience and profitability. For long-term investors, I think Scotts Miracle-Gro looks like a great choice.

Anne Burdakin has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Scotts Miracle-Gro. The Motley Fool has a disclosure policy.

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