Having risen 42% so far this year and 70% over the last 12 months, Scotts Miracle-Gro (SMG 0.77%) is arguably already a millionaire-maker stock. The question is: Can it do it again? The lawn and garden care products supplier is one of the few companies that appears to have received some sales benefit from the COVID-19 pandemic, and there's reason to believe its sales momentum can continue afterwards. Does it all add up to make the stock a buy now? Let's take a closer look.
Gardening and smoking pot
As Scotts' senior vice president Chris Hagedorn put it on the earnings call, some things people were "going to do when quarantine hit the whole country is they're going to sit at home and smoke pot and garden." That might not be great news for the rest of the economy, but it's pretty good for the company's lawn and indoor gardening products.
The gardening part comes from its U.S. consumer segment (lawn and gardens) while the cannabis connection comes from Hawthorne, its hydroponic & indoor garden business.
Image source: Getty Images.
Scotts is often cited as a play on cannabis and that's a fair argument. Although its cannabis-related activities generated less than 11% of its profits in the first half, they contributed a significant part of the profit increase. In other words, the growth kicker is coming from Scotts' cannabis-related sales.
| Scotts Miracle-Gro Segment |
Sales |
% Change |
Segment Profit |
Change |
|---|---|---|---|---|
|
U.S. Consumer |
$1,250 million |
11% |
$332 million |
$55 million |
|
Hawthorne |
$429 million |
51% |
$39 million |
$25 million |
|
Other |
$70 million |
(4%) |
$0.4 million |
$0.6 million |
|
Total |
$1,749 million |
18% |
$371 million |
$80 million |
Data source: Scotts Miracle-Gro presentations.
It appears that the company has seen some benefit to sales from the COVID-19 crisis and the bullish hope is that it will spur a long-term interest in gardening and cannabis cultivation. If so, Scotts could be set for a multi-year expansion in sales and earnings.
Conservative-looking guidance
The results in the first half, and notably the second quarter, were so good that management's guidance looks a bit conservative. For example, Hawthorne sales rose a whopping 60% in the second quarter, but management only upgraded its full-year sales guidance for the segment to a range of 30% to 35%, compared to previous guidance for 12% to 15%.
Meanwhile, even though the U.S. consumer segment sales rose 11% in both the first half and second quarter, management's full-year sales growth guidance for the segment remains between 1% and 3%. This is partly down to the heavy seasonality in the consumer segment's revenue. However, sales are heavily weighted toward April and May, but Jim Hagedorn described sales in the last week of April as being "pretty crazy" so there's reason to be positive ahead of the company's update in early June.
Both look a little conservative, as does the total full-year sales growth guidance of 6% to 8% compared to 18% growth in the first half. It calls into question management's full-year EPS guidance for $4.95 to $5.15. Interestingly, the Wall Street consensus is above the high end of management's range, at $5.26, a figure that would give the company a fiscal 2020 price-to-earnings ratio of a bit less than 29 times earnings.
Looking ahead
The subject of guidance came up on the earnings call, with CFO Randy Coleman reminding investors, "this business can be incredibly volatile and seasonal." However, CEO Jim Hagedorn added that "sales over like last week have been like pretty crazy."
The company is clearly in growth mode right now, but after a very strong run, its stock price is now reflecting the better-than-expected sales growth in the first half. Moreover, the sales boost in the first half may well be coming, at least partly, from consumers buying ahead in anticipation of having difficulties obtaining products down the line due to the COVD-19 pandemic.
It's also fair to say that the U.S. consumer and Hawthorne segments have a somewhat patchy record of growth. For example, according to the company's SEC filings U.S. consumer sales rose 8.1% in 2019, but had declined 2.4% in 2018, and 2% in 2017.
Meanwhile, Hawthorne has a track record of highly volatile sales growth. Organic volume increased 20% in 2017, only for organic sales to decline 27% in 2018 but then grow 24% in 2019. It's a growing business, but it's definitely not going to be in a straight line.
A millionaire maker stock?
Scotts Miracle-Gro could be a millionaire maker stock. A combination of low single-digit growth in the U.S. consumer segment from new cohorts of gardening enthusiasts coupled with high single-digit growth in Hawthorne from cannabis growers could drive mid-single-digit revenue growth and margin expansion over the long term.
That said, the volatility of sales growth at Hawthorne and the possibility that some sales have been forward suggests investors should be a bit cautious after such a strong share price rise. Moreover, the reality is that most of the market is probably expecting a guidance hike for 2020 to come soon, so a lot of the good news is already priced in.
All told, Scotts Miracle-Gro is a very interesting stock, but this might not be the right entry point into it.
