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Bear of the Day: Scotts Miracle-Gro (SMG)

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Known for its popular lawn and garden care products, Scotts Miracle-Gro Co. (SMG - Free Report) is one of the most recognized names in the gardening industry. Its U.S. brands include Scotts, Miracle-Gro, Ortho, and Smith & Hawken. The company’s customers are wide-ranging, from home improvement centers and hardware chains to nurseries and specialty crop growers.

Over the years, Scotts has been making a name for itself in the marijuana industry. It has been developing potting soil specifically for growing marijuana, as well as acquiring key hydroponics companies.

Disappointing Q2 Results

The Zacks Rank #5 (Strong Sell) stock reported second quarter fiscal 2018 results a couple of weeks ago, and both earnings and revenues missed our consensus estimate.

EPS was $2.88 per share, falling way behind the Zacks Consensus of $3.42 per share.

Revenues fell 7% year-over-year to $1.01 billion, while U.S. Consumer segment sales were down 6% and Hawthorne segment sales were down 29% to $41.8 million.

The decline in revenues was primarily due to a delayed start to the lawn and garden season in the U.S after a long winter. CEO Jim Hagedorn also noted that “consumer purchases entering May are down double digits from a year ago” but in markets like California and Florida, consumer purchases were in-line with last year’s results.

Company-wide gross margin declined 240 basis points to 40.4%.

Earnings Outlook

Estimates took a hit in the days following the report.

For the current quarter, two analysts cut their outlook in the last 60 days, and the consensus has dipped nine cents from $2.77 to $2.98 per share. Earnings are only expected to grow around 1.9% for the quarter.

Five analysts have revised their estimates downward for the current fiscal year, and earnings are projected to increase a minimal 1%. The consensus has decreased from $4.68 to $3.98 per share.

Looking at the next fiscal year, earnings could grow about 20%, and the current consensus sits at $4.80 per share.

Can SMG Stock Turn Around?

Shares of Scotts Miracle-Gro are down 18% so far this year and have slipped about 2% in the past one year. Compared to the S&P 500, the index has gained 1.9% and 15.6%, respectively.

The company is currently trading at a forward P/E of 21.2X.

Despite its lackluster Q2 earnings report and widespread downgrades as a result, analysts at SunTrust Robinson Humphrey feel there’s potential in SMG, and upgraded the stock to a Buy.

According to SunTrust, Scotts stock has now “bottomed,” and there’s “potential for upside”; the firm also notes that the company’s shares tend to rise from June to January rather than the spring planting season.

Additionally, SunTrust believes SMG can be a “call option on [the] cannabis legalization trend.” The company did just buy hydroponics company Sunlight Supply earlier this year and bought General Hydroponics back in 2015.

But, Scotts has been having problems with its marijuana-linked Hawthorne business division, with 2018 sales to be flat year-over-year at best.

For investors wanting exposure to marijuana stocks, and one with more near-term potential, they should consider AbbVie (ABBV - Free Report) , a large cap biopharmaceutical company that has one of the first FDA approved cannabis-based drugs, Marinol, on the market. It’s a #3 (Hold) on the Zacks Rank right now, but earnings could grow almost 39% for the current fiscal year.

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