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Cannabis-Connected

This company is already a leader in consumer fertilizers and weed-control products, but a recent acquisition lifted its revenue 36.4% in the most-recent quarter and positions it for even more growth in sales to the cannabis industry. That should help to sustain its dividend, which now yields a solid 3.3%.

Scotts Miracle-Gro Company, $81.16, symbol SMG on New York (Shares outstanding: 55.4 million; Market cap: $4.5 billion; www.scottsmiraclegrow.com) manufactures, markets, and sells consumer lawn and garden products worldwide. In the past few years, Scotts has sold most of its foreign operations to focus on the U.S.

In 2013, the company’s CEO Jim Hagedorn decided to branch out into offering products for marijuana growers.

Since then, Scotts has made numerous acquisitions of leading companies providing specialty fertilizers, “grow lighting” and other supplies for hydroponics; that’s the indoor method of growing cannabis favoured by U.S. and Canadian producers.

Right now, hydroponics (through Scotts’ Hawthorne division) represent roughly 10% of the company’s sales, but those sales should rise as more U.S. states legalize cannabis.

As well, Scotts recently acquired Sunlight Supply Inc., the top U.S. distributor of hydroponics products, for $458.6 million. Scotts will now serve 1,800 hydroponic retailer customers in the U.S.—Sunlight has nine distribution facilities across North America. The company expects its efforts to eliminate overlapping operations will cut $35 million from its annual costs, starting in 2020.

Scotts’ sales rose 21.7%, from $2.19 billion in 2014 to $2.66 billion in 2018 (fiscal years end September 30).

Earnings jumped 39.6%, from $170.0 million in 2014 to $237.4 million in 2017. Earnings per share gained 44.9%, from $2.72 to $3.94, on fewer shares outstanding. However, earnings declined to $3.71 a share (or a total of $211.6 million) in 2018. That’s mainly because unfavourable weather conditions hurt demand for its lawn and garden products.

In its fiscal 2019 first quarter, ended December 29, 2018, Scotts’ sales rose 34.6%, to $298.1 million from $22.15 million a year earlier. That gain was mainly due to the acquisition of Sunlight Supply.

If you disregard costs to integrate Sunlight Supply and other unusual items, the company’s losses worsened to $77.0 million, or $1.39 a share, from $62.2 million, or $1.08, a year earlier. Due to the seasonal nature of its business, Scotts typically loses money in its first quarter. The higher losses were due to higher freight costs and losses on fuel hedging contracts.

The company ended the quarter with cash of $22.6 million. Its long-term debt of $2.2 billion is a high, but manageable 49% of its market cap.

A California jury recently awarded $289 million (later reduced by the judge to $78 million) to a man who claimed that Roundup weed killer caused his cancer. Roundup is made by Monsanto, which is now owned by German pharmaceutical/chemical firm Bayer. Scotts is the exclusive distributor of the consumer version of Roundup weed killers in the U.S. and Canada.

Bayer plans to appeal the ruling. Even if it loses and has to stop making Roundup, that would have little impact on Scotts. Those products account for just 5% of the company’s total sales.

Scotts will probably earn $4.19 a share for all of fiscal 2019. The stock trades at 19.4 times the midpoint of that range. The company also just raised its quarterly dividend 3.8%, to $0.55 a share from $0.53. The new annual rate of $2.20 yields 3.3%.

Even if the acquisition of Sunlight Supply fails to live up to expectations, the outlook for Scotts’ main business remains bright. The improving U.S. economy and consumer confidence should prompt homeowners to spend more on their lawns. The company also continues to devote roughly 2% of its sales to research. It’s particularly interested in developing environmentally friendly products such as organic fertilizers.

Scotts Miracle-Gro is okay to hold.