What happened
Shares of Scotts Miracle-Gro (SMG -1.80%) were climbing last month. The beaten-down lawn-care company got a spark after reporting fiscal fourth-quarter earnings that were rather weak but enough to encourage some investors to see a buying opportunity.
The cooler-than-expected inflation report for October also gave the stock a boost. According to to data from S&P Global Market Intelligence, the stock finished the month up 22%. As you can see from the chart below, the stock surged through the first half of the month before giving up some of those gains in the back half of November.
So what
Scotts Miracle-Gro has struggled through much of this year as it expected pandemic trends in lawn care to continue and overinvested in the business, which has led to weak bottom-line results.
In the fiscal fourth quarter, which it reported on Nov. 2, sales declined 33%, which included sharp drops in both its U.S. consumer business and its cannabis-focused Hawthorne segment.
The company finished the quarter with $493.6 million in revenue, which missed expectations at $519.9 million.
Scotts also posted another wide loss on the bottom line, which expanded from a per-share loss of $0.96 to $2.04, slightly worse than estimates at $1.97. Additionally, the company announced another $85 million in cost savings, and reaffirmed its target of $1 billion in free cash flow over the next two years.
In the days that followed the Scotts earnings report, the stock rallied as investors seemed to bet that the worst was now behind the agricultural stock. The rally culminated with a surge on Nov. 10 when the Consumer Price Index report showed inflation falling faster than expected, which is good news for consumer discretionary stocks like Scotts as falling inflation will give customers more money to spend.
Now what
In its guidance, the company called for just modest growth in 2023, forecasting low-single-digit operating income growth, showing it will take a while for the company to dig itself of its hole even with nearly $200 million in annual cost-savings.
Scotts trades at a price-to-earnings ratio of 14, and the company's goal of delivering $1 billion in free cash flow makes it look reasonably priced as its market cap is just $3 billion currently. It also offers a 4.7% dividend yield.
Scotts is still a top brand in lawn care, and the business should improve over time, especially with the help of cost-cutting measures.
