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Earnings Not Telling The Story For The Scotts Miracle-Gro Company (NYSE:SMG)

Simply Wall St

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With a price-to-earnings (or "P/E") ratio of 26.2x The Scotts Miracle-Gro Company (NYSE:SMG) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Scotts Miracle-Gro hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Scotts Miracle-Gro

Does Scotts Miracle-Gro Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout Scotts Miracle-Gro's industry may help to explain its particularly high P/E ratio. The image below shows that the Chemicals industry as a whole also has a P/E ratio higher than the market. So it appears the company's ratio could be influenced somewhat by these industry numbers currently. In the context of the Chemicals industry's current setting, most of its constituents' P/E's would be expected to be raised up. However, what is happening on the company's own income statement is the most important factor to its P/E.

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Want the full picture on analyst estimates for the company? Then our free report on Scotts Miracle-Gro will help you uncover what's on the horizon.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Scotts Miracle-Gro would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.3%. Even so, admirably EPS has lifted 67% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 8.9% each year as estimated by the six analysts watching the company. With the market predicted to deliver 9.5% growth per annum, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Scotts Miracle-Gro is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Scotts Miracle-Gro currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Scotts Miracle-Gro (of which 1 is significant!) you should know about.

You might be able to find a better investment than Scotts Miracle-Gro. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.