The Scotts Miracle-Gro Company

SMG Details

The Scotts Miracle-Gro Company (NYSE: SMG) is among the world’s most prominent brands of branded consumer products for lawn and garden care. It has the industry’s most recognized brands, and its Scotts®, Miracle-Gro® and Ortho® brands are market-leading in their categories.

Result Performance for the First Quarter Ended 1 January 2022 – (Q1FY22)

• The sales stood at $566.0 million in Q1FY22, down 24%, primarily driven by Hawthorne segment that fell 38% to $190.6 million on the over-supply of cannabis rise in state-authorized markets that resulted in temporary fall in commercial cultivation activity.
• The GAAP and non-GAAP adjusted gross margin stood at 21.0% and 26.7%, respectively, primarily led by a fall in fixed cost leverage, higher material, and warehousing & distribution costs.
• The GAAP loss from continuing operations stood at $50.0 million, or $0.90 per share in Q1FY22, versus income of $25.2 million, or $0.43 per share in Q1FY21.

Source: Company Reports, Analysis by Kalkine Group

Key Updates

• On 30 March 2022, RIV Capital announced a definitive contract to acquire ownership and control of Etain LLC and Etain IP LLC for ~US$247 million through cash and newly issued Class A common shares of RIV Capital.
• On 8 March 2022, the company decreased its FY22 sales guidance for its Hawthorne segment, leading to lower adjusted earnings per share.
• On 16 February 2022, Scotts Company LLC and Major League Baseball plans to begin accepting submissions for the 2022 Scotts Field Refurbishment Grant Program.

Outlook

The company has guided achieving company-wide sales growth of 0-3% in FY22 with the U.S. Consumer segment sales is expected to remain between 2 to negative 2%. Moreover, the non-GAAP adjusted EPS is likely to stay in a range of $8.50-$8.90 and the gross margin is expected to decline by around 100 to 150 basis points. Besides, the company highlighted that it intends to repurchase up to another $300 million in shares during FY22 in addition to the $113 million of share repurchases undertaken in FY21.

The company expects Hawthorne sales to fall by 15-25%, including the benefit of acquisitions, primarily due to the oversupply of cannabis, leading to a fall in both indoor and outdoor cultivation. This slowdown in cultivation would impact the FY22 financials of the company.

Key Risks

The prevailing COVID-19 pandemic could adversely impact its business, results of operation, financial condition, and/or cash flows. Further, it is exposed to the risk of changes in regulations or regulatory enforcement priorities that could lead to an increase in its costs or restrict its ability to market all its products. It is also prone to climate change and unfavorable weather conditions that could adversely affect its financial results.

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

Technical Overview

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The company has delivered a 6-month and one-year return of ~-17.34% and ~-52.04%, respectively. The stock is trading lower than the average price of the 52-week low-high range at $110.89–$254.14, respectively.

The stock has been valued using EV/EBITDA multiple based relative valuation (on an illustrative basis). The target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average EV/EBITDA multiple (NTM basis), considering a decent outlook for FY22 and its intention to take an inorganic route for growth.

Considering the factors above, we give a “Speculative Buy” recommendation on the stock at the current market price of US$118.18 per share, as on 09:16 am New York Time, USA (GMT-4) as of 06 April 2022. 

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

The Scotts Miracle-Gro Company (SMG) is a part of Kalkine’s Global Big Money Product

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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