Scotts Miracle-Gro (SMG) has been jumping this year, and after its latest earnings report and guidance, is set to continue its solid performance in the quarters ahead.
One thing to take into account about its strong numbers is they were measured against weak comps in the year before. Even so, the foundation that has been successfully laid since then and its burgeoning cannabis unit makes Scotts Miracle Grow a legitimate growth story going forward.
In this article we’ll look at why there’s more growth in the future for Scotts, and why. We’ll also look at why investors should temper some of their expectations, based upon management commentary during the earnings report.
Scotts has recently been managing expectations by presenting guidance that is on the low end of the spectrum. So while I suggest lowering expectations, it should be with the thought that Scotts could easily outperform in the quarters ahead, but not likely the way it did in the last reporting period.
Revenue in the second quarter jumped to $1.17 billion, up 18 percent year-over-year. Its U.S. Consumer unit climbed from $811 million last year in the same reporting period, to $889 million this year. Sales from Hawthorne soared from $74 million last year in the second quarter to $176 million this year, up 138 percent. That was in part from its acquisition of Sunlight Supply in June 2018, and from strong organic growth in the unit, which was up 49 percent.
On the organic growth side, that was led by its top two product categories of nutrients and lighting.
On the U.S. consumer side one of the nice surprises for the company was that it expected retailers to slow down moving shipments in the second half, yet hasn’t been the case, which is a major part of the reason for that unit performing so well. It suggests significant demand for its core business.
In its earnings report the company stated it was expecting the U.S. Consumer sales unit to perform at a growth rate of 1 percent to 2 percent. In June the company upwardly revised that to 3 percent to 4 percent, and in late July was again upwardly revised it to 6 percent to 7 percent, based upon customer demand and the aforementioned retailer engagement.
That, combined with the growth expected from Hawthorne should drive the share price up over the next couple of quarters at least.
While still seems conservative given recent trends, SunTrust analyst William Chappell has raised his SMG price target last week to $120 (from $110), while reiterating a Buy rating. (To watch Chappell’s track record, click here)
“With F3Q now behind the company, the focus will now begin to shift to FY20. In that regard, the initial FY20 sales commentary is certainly a positive for both the US Consumer and Hawthorne segments. Looking ahead on Hawthorne, we believe going forward there will be a greater focus on profitability for the segment,” Chappell noted.
One strong catalyst
Probably the most important part of the earnings report was the fact that not only was its cannabis unit doing very well organically, but at the same time the company didn’t drop the ball on its core business, and was able to outperform there as well.
The company said it had purposely decided to temporarily sacrifice some margin for volume in 2019 for Hawthorne, but in 2020 it believes it’ll be able to maintain sales momentum while widening margin and not giving up any market share. That’s another way of saying management believes it’ll retain pricing power next year.
With the expected strong showing of its core business going forward and the growth trajectory of its cannabis unit outperforming, Scotts will reward shareholders for some time to come.
As mentioned, I can’t overemphasis how important it is to the company that management has been able to successfully grow its U.S. consumer sales core business while making great strides with its Hawthorne business that serves the cannabis sector.
If the company is able to deliver on its revenue while widening margin next year, it could surprise a lot of investors to the upside.
The key thing to keep in mind is even though Scotts does appear to have turned the corner and has some good quarters ahead of it, investors should temper their expectations because of the weak comps from the year before.
Even so, organic growth in both of its main units implies the company should still do well for some time, but not quite at the pace we seen in the last reporting period.
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