Hailed as “the unquestioned leader in the U.S. consumer lawn and garden space” by fairness analyst Joe Altobello, Scotts Miracle-Gro (NYSE:SMG) is an organization that makes the thought of watching the grass develop into one thing (financially) thrilling.
With its collection of fertilizers, pesticides, hydroponics gear, and gardening gear, Scotts is uniquely positioned as a result of it serves the marketplace for hobbyists simply as gracefully because it serves industrial markets. And, due to the burgeoning cannabis trade within the U.S., the corporate is able to begin supplying up-and-coming marijuana cultivators, thereby boosting its development. But does that make this inventory value a purchase?
Why it is value shopping for this inventory
The most compelling cause to purchase Scotts is that it is already capitalizing on ever-rising demand from the cannabis trade.
In the newest quarter, Q2 of fiscal yr 2021, Scotts reported that its quarterly income grew by 32.3% year over year and that its earnings grew by 22.9% in the identical interval. Some of this income is probably going from hobbyists seeking to keep busy through the enforced idleness of the pandemic. But the actual returns are from its industrial gross sales to cannabis companies in states that lately permitted some type of marijuana legalization, like Michigan and Oklahoma, the place gross sales have boomed.
Its Hawthorne model of hydroponic gear skilled a gross sales enhance in extra of 60% for the fifth consecutive quarter. Roughly two-thirds of the Hawthorne product base is in durable goods like hydroponics, rising lights, and irrigation controllers. That’s precisely the sort of gear that cannabis growers want, and administration is assured that the trade’s development will proceed to be a serious driver of gross sales.
What’s extra, based mostly on the corporate’s expertise in states like California, the CFO estimates that there’s a lag of roughly one and a half years between new cannabis legalization laws and rising gross sales of the corporate’s merchandise as demanded by the sector’s companies. That’s a counterintuitive piece of nice information for traders, as a result of it means the fast income growth of the previous yr occurred earlier than any affect from the wave of legalization prompted by the 2020 election. So, whereas there’s already a robust affirmation of the investing thesis that Scotts is making the most of prior progress in legalization by advantage of supplying key gear to the cannabis trade, the actual ramp-up is probably going just getting started.
Other views to contemplate
I’ve a number of issues to nitpick about Scotts. The first is that its money holdings are a measly $14.4 million, which is particularly small contemplating the second concern, which is its long-term debt of $2.54 billion. While there isn’t any indication that the corporate may have hassle serving these money owed anytime quickly, its free money move will ultimately be constrained by the dimensions of debt funds. That might ultimately make it tougher to increase into new markets.
Then there’s the bigger concern of upcoming downward strain on its margins that the corporate predicts will proceed to happen all through the remainder of the yr. Its profit margin of 10.91% is wholesome sufficient for now, even when it is not huge. In the newest quarter, its promoting, common, and administrative (SG&A) bills rose 18%, which is sort of sharp, however attributable to new advertising spending. External financial components could quickly be problematic too. Management is cautioning traders in regards to the affect of rising commodity prices, whereas additionally giving due credit score to the margin-reducing results of Scotts’ ongoing fast growth and its battle to satisfy surging demand. To deal with these issues, worth will increase of as much as 9% are scheduled to take impact in August.
I’m bullish on Scotts Miracle-Gro, and I believe that the inventory is value buying this month, at roughly its present worth. I’m at all times a fan of firms that profitably promote important gear to development industries, particularly once they have minimal draw back threat in comparison with their clients.
The firm’s trailer is hitched to the rocket ship of the cannabis trade, and administration clearly understands the wants and timelines of the all-important industrial clients. In quick, it has already sown the seeds for its future success, and the most important problem of the close to future will likely be to reap its crops as effectively as potential.
This article represents the opinion of the author, who could disagree with the “official” advice place of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one among our personal — helps us all suppose critically about investing and make choices that assist us grow to be smarter, happier, and richer.