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.

Record Results in FY21 (For the Year Ended 30 September 2021)

• The company has delivered record financial results in FY21 driven by a company-wide sales growth and sustained growth in all major operating segments.
• The company-wide sales grew by 19% to a record $4.93 billion from $4.13 billion in FY20 and sales in the U.S. Consumer segment rose to $3.20 billion, up by 11% driven by robust consumer demand throughout the year.
• Further, Hawthorne sales grew by 39% to $1.42 billion owing to strong growth in all category segments in both emerging and legacy markets.
• GAAP earnings from continuing operations increased to $9.03 per diluted share against $6.78 per diluted share in FY20.

Exhibit 1: Profitability Trend

Source: Analysis by Kalkine Group

Declared Quarterly Dividend

The board of directors of the company, on 2 November 2021, have approved the payment of a cash dividend of $0.66 per share. The dividend will be paid on 10 December 2021.

Acquired Rhizoflora’s nutrients business

The company, on 16 August 2021, declared the acquisition of Rhizoflora’s leading nutrients business along with its Terpinator and Purpinator brands. This particular acquisition will aid in further bolstering The Hawthorne Gardening Company product portfolio. Separately, its subsidiary, The Hawthorne Collective, has purchased a warrant to buy equity in Dewey Scientific for $3.2 million. This will aid in advancing Dewey’s industry-leading cannabis genomics and cultivation.

Key Metrics

The ROE increased significantly to 60.4% in FY21 compared to 29.0% in FY 2017 and 54.5% in FY20. Moreover, the company’s current ratio was increased to 1.77x in FY 2021 from 1.62x in FY17 and 1.28x in FY20. The company’s net margin increased to 10.5% in FY 2021 as compared to the industry median of 4.8%.

Exhibit 2: Key Financial Metrics

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 58.49% of the total shareholding while the top four constitute the maximum holding. Notably, Hagedorn Partnerships, L.P. and Kayne Anderson Rudnick Investment Management, LLC are holding a maximum stake in the company at 26.16% and 8.29%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Company Reports, Analysis by Kalkine Group

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 of its products.

Outlook

The company has guided achieving company-wide sales growth of 0 to 3% in FY22 and the U.S. Consumer segment sales would be between 0 to negative 4%. However, it forecasts Hawthorne sales to grow by around 8 to 12% and maximum growth is anticipated in the second half of the year.

Moreover, the non-GAAP adjusted earnings per share is likely to stay in a range of $8.50 to $8.90 and the gross margin rate is expected to decline by around 100 to 150 basis points. Additionally, it has guided SG&A to remain in a range of negative 6% to positive 1%. The interest expense is expected to increase by around $25 million.

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

Technical Overview:

Chart:

Source: REFINITIV

Stock Recommendation

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 its record financial results in FY21 as well as decent outlook.

For the purpose of relative valuation, peers like FMC Corp (FMC.N), HB Fuller Co (FUL.N), among others have been considered.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of US$169.20 per share (Time: 10:30 am Eastern Time (New York)) on 9^th November 2021.

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