The Scotts Miracle-Gro Company

SMG Details

The Scotts Miracle-Gro Company (NYSE: SMG) is one of the world’s leading marketers of the branded consumer products for lawn as well as garden care. Its brands are among the most recognized in the industry. The Company’s Scotts®, Miracle-Gro® and Ortho® brands are market leaders in their categories. 

First Quarter Results (For the quarter ended January 1, 2022)

• The Company-wide sales in the quarter fell 24% to $566.0 Mn. The company posted the seasonal loss from continuing operations of $0.90 per share.
• SMG’s U.S. Consumer segment sales fell 16% to $342.4 Mn. The decline was better than anticipated given the 147% revenue growth in the Q1 a year ago. The segment posted income of $10.7 Mn, as compared to the record result of $45.3 Mn a year ago.
• On the company-wide basis, the GAAP loss from continuing operations amounted to $50.0 Mn, or $0.90 per share, as compared to the income of $25.2 Mn, or $0.43 per share, for the Q1 FY 2021. 

Recent Update:

SMG recently lowered the full-year sales guidance for Hawthorne segment and the company stated that the reduction might lead to adjusted EPS which is lower than previously expected. The company is expecting Hawthorne sales to fall 15%- 25%, including the benefit of acquisitions.

Outlook:

The company’s management is optimistic about the continued strength of the U.S. Consumer segment. It is working to moderate the gap in earnings from the shortfall in Hawthorne sales with the goal of achieving non-GAAP adjusted EPS of at least $8.00. 

Key Risks:

The effects of the coronavirus pandemic could have the material adverse effect on the company’s business, results of operations, financial condition and/or cash flows. The highly competitive nature of the markets could affect the ability to maintain or grow the revenues.

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

Technical Overview

Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period) while Green and blue color line represents 21-period and 50-period SMA respectively.

Technical Commentary:

SMG stock price witnessed steep correction from higher levels after the prices made a 52-week high levels in April 2021. Prices are now getting support of the downward sloping trend line that indicates a possible reversal in the coming period. Besides, there is a positive RSI divergence with price clearly visible on chart that further supporting our positive stance. RSI (14-period) trading near to its oversold region that might support the prices in the coming period.

Stock Recommendation:

The stock has been valued using EV/EBITDA multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to EV/EBITDA Multiple (NTM) (Peer Average) (approx) considering the decent outlook. Also, the management of the company is optimistic about the continued strength of the U.S. Consumer segment.  

It was mentioned that the company is no longer expecting the significant acquisition in fiscal 2022 to strengthen its presence in the live goods category.

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.

Considering the aforementioned factors along with the prevailing trading level, we give a “Speculative Buy” recommendation on the stock at the close price of $119.19 as on 8^th March 2022.

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.

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