Scotts Miracle-Gro (NYSE: SMG) Keeps Raising the Bar

Scotts Miracle-Gro NYSE: SMG has been the gift that keeps on giving in 2020. Scotts, the largest provider of gardening and lawncare products in the United States, reported earnings in late July that beat expectations and again raised guidance for fiscal 2020.

Gardening and lawncare are probably not the first things to come to mind when you search for “pandemic winners.” But with Americans spending so much time at home, they are investing in their lawns and gardens.

We’ll start by analyzing Scotts’ 2020 performance and then consider the million-dollar question:

How will Scotts fare post-COVID?

Scotts is Expecting 26-28% Sales Growth for Fiscal 2020

Scotts Q3 2020 earnings (the period ending June 30, 2020) was littered with good news and shares moved nearly 12% higher after the release. Here are some of the highlights:

• Adjusted earnings of $3.80 per share beat estimates of $3.37.
• Revenue grew 28% to $1.49 billion, above estimates of $1.31 billion.
• Company is expecting sales growth of 26-28% for fiscal 2020.

Hawthorne, Scotts’ cannabis-focused subsidiary, saw sales increase 72% to $302.9 billion. Scotts again raised its full-year guidance for Hawthorne, and now expects it to grow 55-60% for fiscal 2020.

COVID Positively Impacted Business

On the Q3 2020 earnings call, CEO Jim Hagedorn acknowledged that “the big-picture trends around COVID-19 undoubtedly had a positive impact in our industry and our brands.” The numbers back up what he said:

“We told you on our last call, the 30% of edible gardening activity came from consumers who are either new to the category this year or returned to the category after stepping away. Since then, we've conducted some additional consumer research, which tells us that long-care participation increased by 14%, meaning an additional 8 million households use grass seed or lawn food for the first time this year. We also know that 28% of all homeowners said they spent more time on overall lawn and garden activities this year.”

Can Scotts Maintain Its Momentum in 2020?

I’ll start by saying I’d be shocked if Scotts sees 20%+ growth in 2021 and beyond.

That said, there is reason to believe that Scotts can achieve high-single digit growth for years to come.

SMG is laser-focused on its marketing, noting, “we made major improvements to our marketing efforts in 2020.”

Scotts isn’t simply advertising – it is seeking to make connections with prospects and existing customers. In 2020, with people increasingly desiring connections with the businesses they buy from, Scotts is on the right track.

Another thing working in SMG’s favor is the number of people moving to the suburbs. The more people move from apartments to houses, the more potential customers for Scotts. It’s impossible to quantify the impact of this trend on Scotts’ business, but its yet another tailwind for an already prosperous business.

The Price is Right

SMG is trading at around 23x forward earnings, a very reasonable valuation for a growing company.

Scotts recently declared a special dividend of $5 per share, and also raised its quarterly dividend from 58 cents to 62 cents. The dividend won’t make you rich, but the nearly 1.5% yield is gravy on an already attractive investment.

Look for a Pullback

Scotts has made several fresh all-time highs since reporting earnings a little over a month ago.

But yesterday, the market tanked and Scotts was no exception, with shares dipping nearly 4%. Not what you want to see, but on the plus side, volume was light.

Shares are now trading around 10% above the 50-day moving average. I’d look for a pullback to the 50-day moving average before getting in. The 50-day will continue to move up, so it could meet the share price in the low $150s.

Ideally, volume on the pullback would be light and shares would stage a reversal near the moving average.

The Final Word

SMG is an excellent business trading at a reasonable valuation. Its not going to be a 10-bagger, but it offers a high floor along with decent upside.