There Are Weeds In The Garden At Scotts Miracle-Gro

Scotts Miracle-Gro Retracts Guidance 

Scotts Miracle-Gro (NYSE: SMG) is experiencing the “cannabis effect” and we should have seen it coming. They got into the cannabis business with the acquisition of Hawthorne way back when there was still some optimism the industry was going to boom and it hasn't. Since then, results in the Hawthorne segment have been tepid and we don’t think they’re going to get any better, not until there is full, national, U.S. legalization anyway and who knows when that will come. Until then, this stock is still a very high-quality dividend grower and one with a sound business. Trading at 13X its earnings it is a value as well and it may be near the bottom. 

Scotts Miracle-Gro Wobbles On Mixed Results 

Scotts Miracle-Gro brought in $1.68 billion in revenue for the quarter which was exactly as expected. The revenue was driven by flat results in the US consumer segment offset by a 44% decline at Hawthorne. Revenue is also down from last year, and the guidance is very weak as well. The bad news is that margins continue to contract despite the company’s efforts to control them. The adjusted gross margin contracted by 110 basis points and there was deleveraging at the operating level as well. The good news is that margin came in above expectation and the company is taking additional steps, beyond pricing, to address the issues and those impacts should be felt very soon. 

“Fortunately, consumer purchases have gained considerable ground in recent weeks. For example, key early-breaking markets in the south are down mid-single digits entering May after being down double digits two weeks earlier. The combination of improved weather, strong retailer promotions through Memorial Day, and favorable comparisons for the balance of the season should be tailwinds for the rest of the year. Still, we now believe the low end of our sales guidance range for U.S. Consumer of plus-or-minus 2 percent from last year’s performance is our most likely outcome,” said Jim Hagedorn, CEO of Scotts Miracle-Gro.

Scotts Miracle-Gro’s Dividend Is Still Growing 

As tepid as the results are, Scotts Miracle-Gro is still a very healthy company and one producing tremendous cash flow. That cash flow is being used to maintain a fortress balance sheet and return capital to shareholders in the form of a dividend. The dividend is a relatively high yield with shares trading near $105, about 2.5%, and there is a positive outlook for growth. The company is paying out less than 30% of its earnings and has a history of increases that spans 12 years. This is part of the reason why the analysts rate the stock a firm Buy but the sentiment is slipping. Barclays is the first to come out with post-earnings commentary and it includes a downgrade from Overweight to Equal Weight and a price target reduction that assumes about 5% of upside for the stock. 

The Technical Outlook: Scotts Miracle-Gro 

Price action in Scotts Miracle-Gro popped in the wake of the earnings report but quickly met resistance below the short-term moving average. The ensuing action is also showing some signs of support, as well, so this may be a bottom in the stock but we don’t think so. The trend is down and guidance has been lowered so there is a real chance for prices to move lower. Assuming the market has already priced in the guidance reduction, price action should confirm support at this level fairly soon. If not, a move to a low could take it back down to the pandemic low before the sell-off is over.