Scotts-Miracle Gro Looks Buyable After Q1 Earnings

Mixed Results Leave Scotts-Miracle Gro Feeling Flat 

We were expecting some strength in the Scotts-Miracle Gro NYSE: SMG earnings report and we got some albeit a lot weaker strength than what we were looking for. Based on the market’s reaction, it too was looking for more in the results but there is something to take note of. While the results were lackluster they didn’t spark any kind of major sell-off which leaves us thinking it may be time to scoop up some of these shares. The company didn’t perform quite as well as we were hoping but the company is still strong, there are some seasonal factors at play, and the dividend is still attractively priced. 

Scotts-Miracle Gro Gets In The Weeds In FQ1 

Scotts-Miracle Gro had a good quarter in Q1 but there are two things hanging over the report that has left the market feeling a bit meh about the results. The first is the comp which virtually guaranteed the company would see its revenue decline. Scotts-Miracle Gro was still feeling the strength of COVID demand last year and produced a 104% YOY increase in revenue and the first-ever Q1 profit. 

The second is the Hawthorne end of the business. Hawthorne is a maker, installer, and servicer of cannabis growing equipment and facilities and has seen a sharp decline in its business. The decline is due to oversupply in many of the end markets, an oversupply that has curtailed greenhouse needs, at least for now. The company is expecting to see demand at Hawthorne return, as are we, but we see oversupply issues plaguing the cannabis industry basically forever but that is another story. 

So, the $566 in net revenue is down 24.4% from last year but it beat the consensus by almost 100 basis points. The revenue was driven by a 16% decrease in U.S. retail amplified by a 38% decline at Hawthorne that carried through to the bottom line. The company’s margin contracted more than expected and resulted in a GAAP loss due to seasonally expected imbalances and the additional impact of deleveraging and restructuring costs. On the bottom line, the adjusted loss of $0.88 exceeded the Marketbeat.com consensus by $0.15 and will present a headwind to profitability this year. 

Can Scotts-Miracle Gro Grow Its Dividend? 

To put it bluntly, yes, Scotts-Miracle Gro can grow its dividend again this year. The company experienced a larger than expected seasonal loss but there is still strength in the numbers with sales up 55% in the 2-year stack. The outlook for this year has earnings in the range of $8.45 and we see no reason why this can’t be reached. The company’s loss includes inventory builds and prep for the spring growing season that will be leveraged in the coming quarter. The second quarter is traditionally the company’s strongest and growth is supported by widening homeownership and continued strength in home improvement and DIY channels. The flip side is that we aren’t expecting a large increase but, regardless, the stock is yielding 1.75% while trading at 18X earnings. 

The Technical Outlook: Scotts-Miracle Gro Is At A Bottom 

Scotts-Miracle Gro is at a bottom that we think might be “the bottom” for this stock, at least for now. Price action appears to be steadying in the range of $140 to $160 with support evident at $135/$140 and then again at the slightly higher $143.50 level. The price action is supported by the indicators as well with the stochastic showing strong support above its lower signal line and MACD ready to make a bullish swing. The first hurdle for the market is the short-term moving average at $155.30, a move above that would be a bullish indication but price action would still need to move above $165 before we’d start getting really bullish.