The Scotts Miracle-Gro Company

SMG Details

The Scotts Miracle-Gro Company (NYSE: SMG) markets branded consumer products for lawn and garden care. Some of its industry leading brands include Scotts, Miracle-Gro and Ortho.

Key Positives:

Increase in Current Ratio (2.51x in Q1FY22 vs 1.59x in Q1FY21), Increase in Quick Ratio (0.69x in Q1FY22 vs 0.58x in Q1FY21)

Key Negatives: 

Drop in Net Margin (-8.8% in Q1FY22 vs 3.4% in Q1FY21), Increase in Cash Cycle (249.9 Days in Q1FY22 vs 126.8 Days in Q1FY21)

Key Risks:

Competitive Risk, Climate Risk, Inflation Risk, Demand Risk, Macro Risk 

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

• The company reported sales of $566 million during the quarter. This was a decline of 24% owing to a decline in Hawthorne sales due to market scenario.
• The US consumer segment reported an income of $10.7 million during Q1FY22.
• 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, compared to income of $25.2 million, or $0.43 per share in Q1FY21.

Source: Company Reports, Analysis by Kalkine Group

Key Updates

• As per a recent update, the Board of the company has approved the payment of quarterly cash dividend of $0.66 per share and is payable on 10 June 2022.
• The Group has updated on 20 April 2022 that it will release its Q2FY22 results on 03 May 2022.
• 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.

Outlook

The company is optimistic on its U.S. Consumer segment and is looking to offset the decline in Hawthorne sales, and achieve non-GAAP adjusted earnings per share of at least $8.00 in FY22. Better than expected results in U.S. Consumer segment in Q1FY22, along with additional pricing actions that are expected to kick in Q3, positions the company to increase its full-year sales guidance in the range of 2 per cent to minus 2 percent. The management is also view that Hawthorne sales have found the bottom in terms of average daily volume.

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 bottom-line of the company.

Key Risks

The company’s Hawthorne sales have been impacted due to the oversupply of cannabis, which led to a decline in cultivation. Therefore, the sales are prone to the impacts of demand coupled with favorable climate conditions. The Group is also exposed to the risk of synergy from operations in view of the acquisitions made, that might impact its operations. In addition, the current risks of macro instability, COVID concerns, inflation, etc. persist.

 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 ~-31.83% and ~-57.76%, respectively. The stock is trading lower than the average price of the 52-week low-high range at $99.96–$247.84, 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 U.S. Consumer segment 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 closing market price of US$100.45 per share, as of 27th 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.