Saturday, October 1, 2022

Buy Scotts Miracle-Gro (SMG) Stock Before Earnings?


Scotts Miracle-Gro SMG shares have jumped 50% in 2020 even though they have moved mostly sideways during the past three months. Despite its recent underperformance, the lawn care products firm that is also benefiting from the booming legal marijuana business in North America, boasts some solid fundamentals heading into the release of its Q4 FY20 financial results before the opening bell on Wednesday, November 4.

Home Projects & Marijuana Exposure

Scotts Miracle-Gro is a consumer lawn and garden products powerhouse that operates under both The Company’s Scotts and Miracle-Gro brands, as well as Ortho. Wall Street has also grown enamored with its Hawthorne Gardening segment, which is a leader in the hydroponic industry. This helps Scotts Miracle-Gro gain huge exposure to the growing marijuana market, as well as indoor farming in general.

Scotts Miracle-Gro’s sales have climbed by at least 15% for eight quarters in a row. Last quarter (Q3 FY20), the firm’s revenue soared 28%, with Hawthorne up 72%. The company’s hydroponic space has helped SMG achieve this strong top-line expansion over the past two years and it stands to benefit for years, if not decades to come as part of the broader push for marijuana legalization in the U.S. and beyond.

The company has also benefitted from increased home improvement spending, alongside the likes of Home Depot (NYSE:) HD, Lowe’s (NYSE:) LOW, RH (NYSE:) RH, and more. More importantly, this trend could continue for a while as the housing market grows. And investors should note that the housing market is finally being driven by millennials, as the largest portion of the generation starts to get married and have kids.

U.S. home sales surged 10.5% on an annual basis in August, which came after July’s huge growth that represented the strongest monthly gain ever recorded, dating back to 1968. The impressive home-buying data continued in September, with sales of previously owned homes at a 14-year high in September—existing-home sales jumped 9.4% from August.

What Else…

Scotts announced at the end of July a “special dividend of $5 per share” and it lifted its regular quarterly dividend by 7%. This helped showcase its strong position and management’s confidence in its continued success. SMG’s 1.6% dividend yield nearly doubles the 10-year U.S. Treasury’s average and comes in near the average.

Meanwhile, the nearby chart shows that SMG stock is up around 130% in the past five years to easily top the S&P 500. SMG shares have climbed 55% in the past year and 23% in the last six months. It has, however, cooled off recently and closed regular trading Monday at $155 a share. This puts it about 12% off its 52-week highs, which might make it more attractive to some investors.

The stock is also trading at a discount against the S&P 500’s average and its own one-year median in terms of forward 12-month earnings at 19.5X.

Scotts in mid-September raised its fiscal 2020 outlook. “The drivers of our business over the past six months – strong consumer demand and highly engaged retailer support – are expected to carry into the first quarter of fiscal 2021 and give us a solid start to the year,” CFO Randy Coleman said in prepared remarks.

“We continue to expect lower expenses next year will provide tailwinds of roughly a dollar per share. We will provide more details when we provide fiscal 2021 guidance in November.”

With this in mind, Zacks estimates call for SMG’s fourth quarter revenue to soar a whopping 78% from $498 million in the year-ago period to $884.6 million. This is expected to help the company swing from an adjusted loss of -$0.91 a share to +$0.07 per share in Q4. Overall, Scotts adjusted fiscal 2020 earnings are projected to surge over 62% to reach $7.26 a share on 31% stronger revenue—which would come on top of FY19’s 19% sales growth.

Bottom Line

SMG’s positive earnings revisions activity helps it grab a Zacks Rank #1 (Strong Buy) right now, alongside its “A” grade for Growth in our Style Scores system. The company has also topped our bottom-line estimates for three straight periods by an average of over 10%.

Clearly, the market faces near-term uncertainty in the form of the election and the virus. Yet, investors with a longer-term horizon might want to consider Scotts as a play on the housing market, marijuana, and more.

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