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Cannabis-Connected

Since 2013, this company has been providing cannabis producers with fertilizers, “grow lighting” and other products.

Through numerous acquisitions, it has added to that list of products for marijuana growers. The most important of those deals is its recent takeover of the biggest distributor of hydroponics products in the U.S. Hydroponics sales should rise as more states legalize cannabis. But even without those added sales, the company’s core business has a bright future, and it recently raised its dividend.

Scotts Miracle-Gro Company, $75.77, symbol SMG on New York (Shares outstanding: 55.4 million; Market cap: $4.2 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 $450 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 22.0%, from $2.17 billion in 2013 to $2.64 billion in 2017 (fiscal years end September 30). Earnings jumped 59.4%, from $148.9 million to $237.4 million. Earnings per share gained 65.5%, from $2.38 to $3.94, on fewer shares outstanding.

In its fiscal 2018 fourth quarter, ended September 30, 2018, Scotts’ sales rose 15.2%, to $433.9 million from $376.7 million a year earlier. That’s mainly due to the Sunlight Supply purchase. Without that acquisition, sales at its North American hydroponics business (Hawthorne) fell 30%.

If you disregard costs to integrate Sunlight Supply and other unusual items, Scott’s losses expanded to $0.75 a share from $0.26. That’s worse than the consensus estimate of a $0.67 a share loss. Due to the seasonal demand for fertilizers, the company typically loses money in its fourth quarter.

As of September 30, 2018, the company held cash of $33.9 million. Its long-term debt of $1.9 billion is a high, but manageable 48% of its market cap.

The stock fell recently after a California judge awarded $289 million to a man who claimed that Roundup weedkiller 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 weedkillers 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 now expects to earn between $4.10 and $4.30 a share for all of fiscal 2019. The stock trades at 18.0 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 2.9%.

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.