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U.S. cannabis demand helps Scotts Miracle-Gro to record

Hydroponic grow systems and the boom in home and garden products continues to drive growth.

In this second pandemic spring, the options for travel and entertainment are more limited than a year ago, so people are enjoying their homes and garden with new appreciation.

That includes more landscaping, planting more flowers and perhaps expanding vegetable gardens for a bigger harvest. A recent CTV news item noted that nurseries saw summer-like traffic building in late March. Things you can plant and eat like fruit and vegetable seeds were flying off the shelves. 

Scotts Miracle-Gro Co. (NYSE: SMG) a company not often in the news is a leading supplier of many of the household lawn and garden products we all use.

Scotts has sales of US$ 4.1 billion and was founded in Ohio in 1888 to sell grass seed. The products now also include weed and pest control products, potting and garden soils and mulch. Miracle-Gro is a best-selling water-soluble plant food.

 Scotts had a breakout year in 2020 because of the pandemic. This year may be even stronger. Here’s a closer look:

Background: Scotts has deep relationships and powerful distribution channels with the largest North American home and garden retailers. Canadians find their products at most big box stores, including Home Depot, Rona Lansing, and Canadian Tire.

In 2014, Scotts formed the Hawthorne Gardening Co. to provide fertilizers and hydroponic growing systems to the burgeoning cannabis industry. As the industry has matured, Scotts has become the main source of liquid nutrients and hydroponic growing media, seeing double digit annual growth in this segment. 

Performance:  Scotts shares closed at US $236.08 Tuesday up 89.2% in the past 12 months and 18.5% year-to-date.

Recent developments: First-quarter results were a record and it was the first time the company has reported a first-quarter profit. Sales rose 105% year-over-year to $748 million. Earnings per share of $0.43 compared with a loss of $1.28 per share in 2020.  

Hawthorne accounts for 26% of revenues and first-quarter sales increased 71% to $309.4 million, driven by strong demand in all categories of indoor growing equipment and supplies. U.S. consumer sales, the largest segment at 69% of revenues, increased 147% to $408.2 million. Consumer purchases at its largest retail partners increased 40%.

Discussion: In early April, Scotts raised its guidance. It expects sales to grow between 8% and 12% this year, double its earlier estimate. Adjusted earnings per share should be in the range of $8.60 to $9.00. At $8.60, earnings per share would be 19% higher than 2020, at the high end 24%. Hawthorne will see growth of between 20% and 30%.

“None of us anticipated what Hawthorne would become,” CEO Jim Hagedorn said during a virtual meeting with analysts, calling the growth of the pot industry a “cannabis wave.”

Mr. Hagedorn said Scotts thought Hawthorne would serve urban gardeners, but it is now focused on professional cultivators.

“We were willing to enter a space that other public companies openly avoided and most still do. We have created an industry leading business.”

In its more mature consumer business, millennials make up an increasing share of customers. He noted that 40% of new homes purchases are by millennials.

Dividend: Scotts increased its dividend by 7% to $0.62 quarterly with the September payment. It also issued a one-time special dividend of $5 per share. The forward dividend yield is 1.07%. The odds favor another increase this summer.

The stock carries a high p/e ratio of 28.9 but has good prospects. The cannabis business is in the early stages of growth.

This is an edited version of article that appeared in the Internet Wealth Builder on April 26, 2021.  For information on how to reprint this article please view this page.

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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