Scotts-Miracle Grow (NYSE:SMG) Growing, Growing, Growing

Another Blow-Out Quarter For Scotts-Miracle Grow

Scotts-Miracle Grow (NYSE:SMG) emerged as a winner early in the pandemic and is one rebound story that has legs. This company is not only producing strong double-digit growth that growth accelerated in the 4th quarter and more is expected for next year. Among the company’s many virtues are its balance sheet, cash flow/free-cash-flow, and dividend, all of which make this stock a buy.

“The momentum we enjoyed throughout fiscal 2020 accelerated further in the fourth quarter and is carrying into the first quarter of fiscal 2021 as well,” said Jim Hagedorn, chairman and chief executive officer. “The 90 percent fourth quarter increase in our U.S. Consumer segment was driven by continued strong consumer demand and support from our retailers who were replenishing inventory levels in anticipation of continued strength. The growth in Hawthorne also continued to gain steam as September was our highest sales month ever.”

Scotts-Miracle Grow Revenue Growth Accelerates

Scotts-Miracle Grow saw its revenue decline on a quarterly basis but that is about the only bad thing I can say about the Q4/Calendar Q3 report. Aside from that, the company reported a 78.9% increase in YOY growth that accelerated from 16.2% and 27.5% in the fiscal 2nd and 3rd quarters of the year. The 4th quarter revenue also beat the consensus by 4.0%. The strength was driven by U.S. Retail, up 90%, and the acquisition of Hawthorne last year. The Hawthorne segment saw its revenue rise 68% YOY and 61% QoQ.

Moving down to the bottom line, EPS was only in-line with the consensus but consider this. The $0.06 adjusted and $0.07 GAAP is pretty weak on a sequential basis but flies in the face of history; Scott’s-Miracle Grow typically posts a loss in the 4th quarter. Last year it was -$0.91. For the full year, EPS of $7.24 beats the consensus by more than a nickel.

On an operating basis, operating cash flow is more than double last year’s amount and 89% of it is listed as free-cash-flow. That’s important because the company is still growing. Along with the report, SMG execs announced the intent to purchase another 25% of Bonnie Plants from its current owner. The deal will bring SMG’s ownership stake in the company to 50% and help fuel growth next year. In terms of guidance, the company is expecting 0% to 5% growth, not including the Bonnie Plants

“While the impact of the proposed transaction is expected to be accretive to earnings in fiscal 2021, it is not contemplated in the Company’s current guidance. Financial terms are not being disclosed at this time.”

Scotts-Mircle Grow Is Growing Its Dividend Too

Scotts-Miracle Grow is using some leverage to fuel its growth but I don’t see anything worrying in the numbers. The stock is trading about 19X next year’s earnings but you get a lot of value for the money including a safely growing dividend. The payout ratio for F2021, based on the company’s own guidance, is sub-30% with ample free-cash-flow so I do expect a 12th consecutive distribution increase late in the fiscal year.

On a technical basis, the stock looks ready for another run higher and price action is edging higher. There is a possibility of resistance at the $160 level but it may not be strong. If price action moves above there the next big target is near $170. The $170 level will be the real hurdle, if price action can clear that it’ll be in the new all-time-high territory with double-digit gains in sight.