Scotts Miracle-Gro Company

SMG Details

Scotts Miracle-Gro Company. (NYSE: SMG) is engaged in manufacturing and distributing gardening and lawncare products across North America, Europe and Asia. The company is also a leading supplier of cannabis growing equipment in North America through its Hawthorne business. SMG operates in three business segments, viz. 1) U.S. Consumer, comprised of consumer lawn and garden business in the U.S.; 2) Hawthorne, consisting of indoor and hydroponic gardening business; and 3) Other, including consumer lawn and garden business in geographies other than the U.S. SMG's consumer and lawn business in North America is highly seasonal, with more than 75% of yearly sales occurring in the Q2 and Q3. As of July 15, 2021, the company’s market capitalization stood at USD 10.01 billion.

Backing Bayer’s Consideration of Roundup: On May 27, 2021, SMG announced that it is working with Bayer regarding glyphosate-containing Roundup products to ensure the brand’s future in the consumer marketplace. Roundup is regarded as a trusted brand with decades of track record in the lawn and garden business. SMG stated that it is working with Bayer to look for other effective active ingredients to meet the demands of homeowners and retailers. SMG is not a party to any potential Roundup legal difficulties and is indemnified against any legal proceedings and costs.

Q2FY21 Results: The company reported a sharp uptick of 32.25% in its net sales to USD 1.83 billion in Q2FY21 (ended April 03, 2021) compared to USD 1.38 billion in Q2FY20 (ended March 28, 2020), primarily due to an increase in sales volumes, increased prices in its Hawthorne and other segments, and the favorable impact of foreign exchange rates. SMG reported the net income of USD 310.2 million in Q2FY21 vs USD 252.4 million in Q2FY20. As of April 03, 2021, the company’s cash and cash equivalents amounted to USD 14.40 million, with a total debt of 2.54 billion.

Key Risks: SMG's two largest customers, Home Depot and Lowe's, accounted for 44% of the net sales and 58% of the outstanding accounts receivable in FY20. Such undue reliance on specific customers for business could hurt the company's financial health in the future.

Outlook: As of June 1, 2021, the company expects its sales for FY21 to grow by 17 to 19% compared to the previous year due to solid growth in the U.S. consumer segment. In addition, SMG expects its Hawthorne sales to increase by 40 to 50%. Further, the company projects its adjusted non-GAAP earnings to be in the range of USD 9.00 to USD 9.30 per share.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Analysis by Kalkine Group)

• % Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

SMG Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: SMG share price fell by 24.07% in the past three months and is currently leaning towards the lower-band of the 52-week range of USD 137.21 to USD 254.34. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is 28.55. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 212.82. Considering the company’s strong track record, growth prospects, strong margins, and current valuation, we recommend a “Buy” rating on the stock at the closing price of USD 177.99, down 1.00% as of July 15, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.