Bear of the Day: The Scotts Miracle-Gro Co. (SMG)
The Scotts Miracle-Gro Company SMG is involved in the manufacturing and marketing of products for lawn care, garden care, and indoor and hydroponic gardening. The company offers lawn fertilizers, grass seed products, spreaders, as well as lawn-related weed, pest and disease control products. In addition, its gardening and landscape products are comprised of water-soluble and continuous release plant foods, potting mixes and garden soils, mulch, and decorative groundcover products.
The company sells its products under recognized brands such as Scotts, Turf Builder, EZ Seed, PatchMaster, Thick’R lawn, Miracle-Gro, Weed B Gon, and Roundup. Scotts Miracle-Gro serves home centers, mass merchandisers, warehouse clubs, large hardware chains, garden centers, food and drug stores, retailers, and indoor gardening and hydroponic distributors.
The Zacks Rundown
Scotts Miracle-Gro, a Zacks Rank #5 (Strong Sell), is a component of the Zacks Fertilizers industry group, which ranks in the bottom 3% out of more than 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months, just as it has year-to-date:
Image Source: Zacks Investment Research
Candidates in the bottom tiers of industries can often be solid potential short candidates. While individual stocks have the ability to outperform even when included in a poorly-performing industry group, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more difficult.
SMG shares are having trouble sprouting lately. The stock experienced a climax top more than two years ago and has been in a price downtrend ever since. Shares recently gapped down following a disappointing earnings report and represent a compelling short or hedge opportunity as the market takes a breather from its strong rally this year.
Recent Earnings Misses and Deteriorating Outlook
SMG has fallen short of estimates in two of the last four quarters. The lawn care company most recently reported fiscal third-quarter earnings earlier this month of $1.17/share, missing the $1.41/share consensus EPS estimate by 17.02%. Earnings declined 40.9% from the same quarter in the prior year.
The stock has moved steadily lower since the announcement. Consistently falling short of earnings estimates is a recipe for underperformance, and SMG is no exception.
Scotts Miracle-Gro has been on the receiving end of negative earnings estimate revisions as of late. For the current quarter, analysts have decreased estimates by 55.56% in the past 60 days. The fiscal fourth-quarter Zacks Consensus EPS Estimate is now -$2.66/share, reflecting a 30.39% regression relative to the same quarter last year.
Image Source: Zacks Investment Research
Falling earnings estimates are a huge red flag and need to be respected. Negative growth year-over-year is the type of trend that bears like to see.
Technical Outlook
As illustrated below, SMG stock is in a sustained downtrend. Notice how shares have plunged below both the 50-day and 200-day moving averages signaled by the blue and red lines, respectively. The stock is making a series of lower lows, with no respite from the selling in sight. Also note how the 50-day moving average has rolled over and is sloping down – another good sign for the bears.
Image Source: StockCharts
While not the most accurate indicator, SMG stock has also experienced what is known as a ‘death cross’, wherein the stock’s 50-day moving average crosses below its 200-day moving average. Scotts Miracle-Gro would have to make a serious move to the upside and show increasing earnings estimate revisions to warrant taking any long positions in the stock. The stock has fallen more than 23% in the past 3 months alone.
Despite the underperformance, SMG stock remains relatively overvalued, irrespective of the metric used:
Image Source: Zacks Investment Research
Final Thoughts
A deteriorating fundamental and technical backdrop show that this stock is not due to bloom anytime soon. The fact that SMG stock is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.
Lingering high commodity costs are also a concern, which will continue to exert pressure on company margins. Potential investors may want to consider including this stock as part of a short or hedge strategy. Bulls will want to steer clear of an overvalued SMG until the situation shows major signs of improvement.
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The Scotts Miracle-Gro Company (SMG) : Free Stock Analysis Report
