Sales to U.S. and Canadian cannabis producers now account for 17% of revenue for this maker of lawn and garden products. This should keep rising as a growing number of U.S. states legalize cannabis. The company’s overall sales rose 17.7% in the most recent quarter, while the stock yields 2.1%.
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Scotts Miracle-Gro Company, $112.58, symbol SMG on New York (Shares outstanding: 55.5 million; Market cap: $6.2 billion; www.scottsmiraclegro.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 17% of the company’s sales, but those sales should rise as more U.S. states legalize cannabis.
As well, in June 2018, Scotts acquired Sunlight Supply Inc., the top U.S. distributor of hydroponics products, for $458.6 million. Scotts now serves 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 $30 million from its annual costs in its 2019 fiscal year.
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 third quarter, ended June 29, 2019, Scotts’ sales rose 17.7%, to $1.17 billion from $994.6 million a year earlier. That gain was partly due to the acquisition of Sunlight Supply. Strong U.S. consumer demand for lawn and garden products also contributed to the higher sales.
If you disregard costs to integrate Sunlight Supply and other unusual items, the company’s earnings improved 17.5% to $176.3 million from $150.1 million a year earlier. Due to more shares outstanding, earnings per share gained 16.5%, to $3.11 from $2.67.
As of June 29, 2019, the company’s long-term debt was $1.56 billion. That’s a manageable 25% of its market cap. Scotts also held cash of $36.4 million.
Scotts is also the exclusive distributor of the consumer version of Roundup weed killers (made by Monsanto, a unit of Germany’s Bayer AG) in the U.S. and Canada.
The company and Monsanto have now agreed to amend that relationship. As a result, Monsanto will pay $112 million to Scotts for the rights to four Roundup-branded product lines (not weed control products). Scotts will also act as the marketing agent for those products, and the two companies will equally share future profits on their sales, which should total $15 million in fiscal 2019.
As well, Monsanto and Scotts will also equally share profits on consumer sales of Roundup-brand weed killers. Scotts expects the new agreement will increase its annual commissions by $20 million, stating in fiscal 2020.
However, Bayer now faces over 18,000 lawsuits from farmers, gardeners and landscapers claiming that Roundup weed killer caused cancer in those individuals. So far, Bayer has lost three U.S. jury trials and is appealing the decisions.
Scotts expects to earn between $4.35 and $4.50 a share for all of fiscal 2019. The stock trades at 25.4 times the midpoint of that range. The $2.20 dividend yields 2.1%.
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.
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