For Immediate Release
Chicago, IL – July 15, 2019 – Zacks Equity Research Shares of Scott’s Miracle Grow's SMG as the Bull of the Day, ADT Inc. ADT as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Innovative Industrial Properties IIPR and GW Pharmaceuticals GWPH.
Here is a synopsis of all four stocks:
Bull of the Day:
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.
Scott’s Miracle Grow's “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.
Scott’s Miracle Grow has many successful brands that have nothing to do with cannabis, including Scott’s, Miracle Grow, Ortho, and TruGreen. In fact, in the most recent quarter, Scott’s 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.
Scott’s 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.)
Scott’s 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.
Scott’s shares have been on a tear in 2019, up over 60% YTD, massively outpacing the fertilizer industry - which is basically flat on the year.
Bear of the Day:
Most great business have built some kind of moat around themselves. As an economic concept, it’s known as “barriers to entry” – meaning that competitors can’t easily enter the market.
Sometimes those barriers are natural. The most obvious example is the utility business - where the initial investment in infrastructure is generally so insurmountable that state and local governments generally regulate pricing behavior to ensure that citizens have access to gas and electricity at reasonable rates.
More often, the barriers are created by the business themselves. Pharmaceutical companies spend a great deal of time and money applying for and litigating the infringement of patent protection on their intellectual property. They’ve developed unique compounds and/or processes which the government then grants them the exclusive right to sell in the market, and they use that exclusive right to command a premium price for a set amount of time.
The barriers could also reside in the minds of consumers themselves. Companies develop products and services that customers get used to, come to trust and continue to buy even in the face of lower-priced competition. It’s most commonly called “branding.”
Branding is the most tenuous type of barrier because customers can be very fickle. Also, as new generations become the next wave of consumers, not only do they tend not to respect the brands of the past, they often actively shun them as old news.
This is exactly the predicament in which security firm ADT Inc. currently finds itself.
Security – especially home security – used to be a gravy train for a handful of household-name companies. Because the equipment had to be installed by a professional and then connected to a monitoring system (usually through phone lines), ADT was able to sell the equipment and then sign the customer up for monitoring services manned by humans for a monthly fee. It was a great business model – money up front and then annuity-like cash flows.
The internet has put a serious dent in that model.
You can now purchase an entire security system online, have it shipped to your home, install it yourself and monitor it (including live and recorded video) through a variety of means, including on a smartphone. You can also subscribe to professional monitoring services if you so desire.
This model is much more appealing to the millennial generation who tend to be tech savvy and also leery of subscription plans. They also like that you can pick up the equipment and take it with you when you move.
Legal Cannabis Faces Competition from Black Market: 3 Stocks to Lead
The recent legalization of marijuana in several states in the US has had many people eager to invest in the emerging sector. The fast-growing industry has led to several legal dispensaries sprouting up throughout the states in which they are sanctioned in. Many people assumed with the legalization of cannabis that the illegal distribution of the drug would disintegrate but that has not been the case. As the legal marijuana business has grown substantially in recent years, so has the unlicensed dispensaries. In California, early projections estimated that cannabis tax receipts would reach $1 billion for 2018 but fell short with only $345 million collected last year.
The black-market dispensaries are cited as a major reason estimates fell short for the industry. Cameron Wald, executive vice president of Project Cannabis, stated that illegal dispensaries can sell the same product for 40% less than licensed dispensaries. The unlicensed dispensaries don’t pay taxes or permit fees to the cities they operate in, which allows them to undercut their legal competitors.
Cannabis industry attorney David Welch believes penalties enforced on the illegal businesses are too low to dissuade their operators to shut down because the profits they see outweigh the sanctions. Penalties are usually listed as misdemeanors, which usually just ends up being a fine that incentivizes the owners to reopen the store. The Los Angeles Police Department estimates there to be around 259 illegal dispensaries operating within the city while there are only 186 licensed dispensaries.
Untapped Market Share
Many people see the continued legalization of marijuana as an opportunity to become a part of the next booming industry. The reality of the situation is that the legalization of the drug has failed to successfully eliminate the illegal distribution of it. While the industry is currently struggling to meet its potential, the underlying opportunity remains.
According to New Frontier Data, there is an estimated $70 billion in illegal sales nationally, which is 7X the size of the legal market. The current legal cannabis industry is only capturing a fraction of the market. If states like California can solve the black-market problem by either issuing harsher sanctions on illegal dispensaries or lowering taxes so legal dispensaries can compete, then it would bode well for the cannabis industry.
Stocks That Can Catapult the Industry
With all of this in mind, some companies still have the potential to capture a much larger share of the cannabis market, catapulting them into one of hottest industries everyone wants to be part of. Let’s take a look at three companies that can help the legal cannabis industry take the next step.
Innovative Industrial Properties is a red-hot REIT that is planning to buy buildings and lease them to growers of medicinal marijuana. The real estate investment trust is focused on the acquisition and management of industrial properties that are leased to experienced state-licensed operators for medical-use cannabis facilities. IIPR is currently listed as a Zacks Rank #2 (Buy) and has had an unbelievable year so far. The stock has skyrocketed 176.1% year-to-date, and is looking to carry on the momentum into the second half of the year. The REIT increased its earnings by 42.11% and its revenue by 42.65% compared to the previous quarter. IIPR has been able to surge to new heights this year and investors looking to get into the cannabis craze should strongly consider them.
The Scotts Miracle-Gro is diving into marijuana production by investing in businesses that sell fertilizers, soil, and other accessories to pot growers. The company also invested in hydroponics, a method of growing that allows producers to grow cannabis indoors. Scots Miracle-Gro is currently sitting at a Zacks Rank #1 (Strong Buy), and has also had a tremendous year. The stock is up 62.4% on the year, leaving the broader fertilizers market in the rear-view mirror. Consensus Estimates are calling for a bottom-line leap of 18.67% with a top line jump of 4.39% next quarter. Looking ahead to the company’s full year outlook, estimates are projecting earnings to increase 16.71% with revenue spiking 12.89% to $3.01 billion. SMG is subsidizing the production of legal marijuana, and its strong first half performance paired with its second half outlook can attract investors looking to be a part of the emerging market.
GW Pharmaceuticals focuses on discovering and developing cannabis-based prescription medicines. The company’s lead product, Sativex, is used for the treatment of MS symptoms, chemotherapy pains, and neuropathic pain. GW Pharmaceuticals is currently listed as a Zacks Rank #2 (Buy) and has provided substantial returns for its shareholders this year. The pharmaceutical company has seen a surge of 76.7% year-to-date and holds the potential to continue this growth.
The company currently isn’t profitable, but our Consensus Estimates are projecting substantial year-over-year growth. Our estimates are forecasting the company’s earnings to increase 89.68% to go along with a revenue surge of 1,731.50% for the current quarter. In addition, revenue is projected to hit $218.50 million this year, which would be a year-over-year increase of 1,188.60%. GWPH is a stock expected to grow substantially in the near future, making it a sound pick for investors looking to include the budding marijuana market in their portfolio.
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