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Bull of the Day: Scotts MiracleGro

David Borun

O.M. Scott began selling seeds to farmers in Ohio 150 years ago. The company he founded expanded to the (then-new) consumer lawn and garden products market in the early 1900’s, and eventually into a wide range of products and services. 

There’s no way Scott could possibly have conceived of what his company has now also become – the largest dedicated supplier of hydroponic equipment and chemical products to the cannabis industry.

Scotts MiracleGro's (SMG) “Hawthorne” division operates 45 separate brands that sell equipment, lighting systems, nutrients and much more for the purpose of growing marijuana indoors. Through a wide range of offerings, they cater to everyone from a home hobby grower to large commercial operations.

Hawthorne also offers services and consulting to growers, designing custom growing environments, assisting with nutrition and chemistry and providing analytical services. They are fully vertically integrated - offering every single product or service that a grower might need, no matter the size of their operation. One stop shopping.

Scotts MiracleGro has many successful brands that have nothing to do with cannabis, including Scotts, MiracleGro, Ortho, and TruGreen. In fact, in the most recent quarter, Scotts' US consumer business made up 84% of sales, while the Hawthorne division only accounted for only 10%. (The remainder was international sales.) They also have licensing agreements to sell other companies’ products.

The truly eye popping numbers came in sales increases for Hawthorne in fiscal Q2.

US consumer sales were $993M, a solid 8% increase over the year ago period. Scott’s described it as a “strong head start” to the lawn and garden season.

Hawthorne sales of $144M during the quarter were a whopping 245% increase over the comparable year-ago period.

Scotts also breaks out profit by segment and the results there are even more impressive. US Consumer products netted $320M – up 12%. Hawthorne netted $10.3M which was 315% higher than the second quarter last year when the division posted a loss of ($4.8M.)

Scotts management confirmed full year earnings guidance of $4.10 – 4.30/share, while hinting strongly that increased guidance might be imminent.

In the marijuana investment segment, Hawthorne is what is known as an “ancillary” company. Because of the bifurcated legal status of marijuana in the US – legal in some way in 33 states but still illegal at the federal level – companies that produce, distribute or sell marijuana products cannot be listed on the major US exchanges. Companies that provide products and/or services to the industry but don’t “touch the plant” are legally in the clear.

Scotts' shares have been on a tear in 2019, up over 60% YTD, massively outpacing the fertilizer industry - which is basically flat on the year.

Thanks to overall solid results across all divisions and the blockbuster potential of Hawthorne, analyst expectations are on the rise as well with 4 upward revisions since the last earnings report which help earn SMG a Zacks Rank #1 (Strong Buy).

Scotts MiracleGro is one of those beautiful investment opportunities in which the basic underlying company represents a solid value in and of itself, but it also has the free call option of owning Hawthorne, which could explode in value, especially if marijuana is legalized at the federal level in the US.

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