One Agricultural Input Stock with Business Updates – SMG

The Scotts Miracle-Gro Company

SMG Details

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

Q1FY22 Results Performance (For the quarter ended January 1, 2022)

• Company-wide sales declined by 24% to $566.0 million during the quarter, in line with a pre-announcement of expected results issued on January 4.
• Sales of U.S. Consumer segment fell 16% to $342.4 million and was better than expected given the 147% revenue growth in Q1FY21.
• The company-wide GAAP and non-GAAP adjusted gross margin rates reduced to 21.0% compared with 25.5% and 26.7%, respectively, a year ago mainly due to a decrease in fixed cost leverage as well as higher material, warehousing, and distribution costs.
• The company reported a seasonal loss from continuing operations of $0.90 per share during the quarter.

Source: Analysis by Kalkine Group

Declared Quarterly Dividend

The board of directors of the company, on 24 January 2022, have approved the payment of a cash dividend of $0.66 per share.

Key Risks

The prevailing COVID-19 pandemic could have an adverse impact on 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 the impact of climate change and unfavorable weather conditions that could adversely affect its financial results.

Outlook

Recently, the company has lowered its full-year sales guidance for its Hawthorne segment as the sales in the segment have been challenged for several months owing to the impact of oversupply of cannabis, thus resulting in a slowdown in both indoor and outdoor cultivation. The company, currently forecast Hawthorne sales to decline 15 to 25%, including the benefit of acquisitions. This revised Hawthorne sales outlook would impact the adjusted earnings per share that are lower than earlier anticipated and the company is unlikely to attain the low end of its guidance for non-GAAP adjusted earnings per share.

The management remains hopeful about the sustained strength of the U.S. Consumer segment and is working to lessen the impact of the shortfall in Hawthorne sales on earnings with an aim to attain non-GAAP adjusted earnings per share of at least $8.00.

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 stock is trading lower than the average price of the 52-week low-high range for the stock at $110.81 - $254.34, respectively, which indicates a good opportunity for accumulation.

The stock has been valued using EV/EBITDA multiple based relative valuation (on an illustrative basis) and 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 better-than-expected result in U.S. Consumer segment in Q1FY22 and focused pricing strategy.

Considering the aforementioned factors, and continued strength of the U.S. Consumer segment, we give a “Speculative Buy” recommendation on the stock at the closing market price of US$124.58 per share, down by 4.33% on 23^rd March 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.

SMG is a part of the Global Big Money Portfolio

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

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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