Companies that benefitted from pandemic stay-at-home home trends have fared differently as the economy has reopened.
Some continue to see strong demand because the pandemic has proved to be an ongoing catalyst for their products. Others have sold off as the economy softens and consumers move discretionary spending to areas that benefit from more normal conditions such as travel and leisure.
Scotts Miracle-Gro Company (NYSE: SMG), a leader in lawn and garden supplies and turnkey greenhouses for growing cannabis, saw its shares rise 200% from their 2020 low to a peak in April 2021. Since then, they have steadily sold off and are now trading at one-third of that peak at the recent price of US $88.95.
Background: Scotts is one of the world’s largest marketers of lawn and garden care products. They include seeds, potting and garden soils and mulch. Miracle-Gro is a best-selling water-soluble plant food. Its Hawthorne Gardening Co. subsidiary provides fertilizers and hydroponic growing systems to the cannabis industry.
Performance: Scotts shares soared during the first pandemic year as lockdowns meant more time spent in the backyard. A new market segment was millennials, many of whom have been buying first homes.
The shares are down 45% year-to-date at the current price.
Discussion: Scotts is facing challenges on several fronts. Inflation is raising prices which is reducing demand. A cold spring in the Northeast slowed sales further and delayed reorders. After two pandemic years, people are spending less time at home. A disappointing delay in a U.S. federal law decriminalizing cannabis has hurt its Hawthorne subsidiary. Hawthorne is a leader in turnkey greenhouses including nutrients and hydroponic lighting an d has invested heavily to build a leading position in that market.
Even so, Scotts prospects are good. It reported strong earnings in May of $5.03 earnings per share, topping analysts’ consensus estimates.
CEO Jim Hagedorn said in a conference call that Scotts experienced 10 years of consumer-led growth in two pandemic years and that growth would be expected to ease. On the cannabis side, he acknowledged that until there is a federal law that part of the business will see slow growth.
Scott’s shares are now trading at 2019 levels. This is even though revenues are 31% higher and earnings per share are 9% higher. There have been three dividend increases since 2019 plus a $5 special dividend during the pandemic.
Scotts continues to lead in its industry and is well placed to benefit from cannabis legalization. The pandemic saw millennials take up gardening in a big way. The stock’s P/E ratio has dropped from a high 28.9 a year ago to an attractive 11.2 at current prices.
Scotts increased its dividend to $0.66 quarterly with the September payment. The forward dividend yield is 3.29% and appears to be sustainable.