2023-11-02 12:16:36 ET
Summary
- The Scotts Miracle-Gro Company has experienced a downward trajectory due to COVID-19 challenges, but recent earnings report shows signs of stabilization.
- Executive team retirements and realignment may improve corporate governance and strategic direction, but could also create short-term uncertainty.
- The company has strengths in brand recognition, a loyal customer base, and improving financial position, but risks include seasonality and high debt levels.
- Based on the technical and fundamental analysis, I recommend patience for the company to complete its realignment and reverse its bearish trajectory.
Investment Thesis
The Scotts Miracle-Gro Company( SMG ) has been on a strong downward trajectory since April 2021. I attribute this poor performance to COVID-19-related challenges, which caused a serious dent in the company’s financial status. However, based on the company’s current affairs, such as the MRQ earnings report, I am cautiously optimistic about the company’s long-term performance.
According to technical analysis, the stock appears to have bounced off the support level, which could indicate a reversal of the bearish trend. However, I am hesitant to regard this as a favorable entry point because it could be a reaction to the company’s recently announced performance. As a result, I would recommend patience while we await a retest of the support zone and the current management realignment, which I will cover in the current events section, to take effect.
Current Affairs And My Take On Them
Following the relatively high volatility of SMG’s shares, as shown by a beta value of 1.85, I am interested in the company’s current affairs and their implications on its shares, as they may serve as volatility catalysts. First off, the company announced its fiscal 2023 full-year results on November 1, 2023. The company reported net sales of $3.55 billion, in line with guidance, and adjusted non-GAAP earnings of $1.21 per diluted share, exceeding guidance. The company also improved its free cash flow by $681 million year-over-year, reaching $438 million. Its stock soared 21% yesterday after the earnings report was less bad than feared. It also posted a narrower-than-expected loss of $6.79 per share, compared with a loss of $7.88 per share in the prior year. The company also reaffirmed its plan to generate $1 billion in free cash flow over two years through fiscal 2024. Furthermore, the corporation paid down debt by $361 million, demonstrating its capabilities and commitment to deleveraging.
Another current affair is its announced executive team retirements and reorganization on September 27, 2023. The company’s President and Chief Operating Officer, Mike Lukemire, will retire at the end of fiscal 2024 and be succeeded by Nate Baxter, who has been promoted to COO. The company also announced the departures of CFO Randy Coleman and Chief Supply Chain Officer Dave Swihart and the realignment of finance, supply chain, and corporate affairs teams.
These are the major current affairs that I believe will influence the company’s share performance. With this in mind, here are my thoughts on how they will shape the company going forward. To begin with, the company’s earnings report, in my view, showed that it has stabilized its business and returned to a more normal state of operating after facing challenges from the COVID-19 pandemic and the decline in the Hawthorne segment. The company also demonstrated its progress on cost savings, debt reduction, and margin recovery. These factors may boost investor confidence and optimism about the company’s future growth prospects.
Secondly, I believe the company’s executive team changes and reorganization may reflect its efforts to improve its corporate governance, leadership, and strategic direction. The company may benefit from the fresh perspectives and energy of the new leaders and the continuity and experience of the existing ones. However, these changes may also create some uncertainty and risk for the company’s operations and performance in the short term as they realign the organization to match the objectives.
My Outlook On SMG
My outlook for SMG is cautiously optimistic, as I believe that the company has some strengths and opportunities that could outweigh its weaknesses and threats in the long run. Here are some of the reasons why I think so:
The company has a strong brand recognition and market leadership in the lawn and garden industry, which is expected to grow at a compound annual growth rate [CAGR] of 7.1% from 2021 to 2028 .
Fortune Business Insights
The company’s U.S. Consumer segment, which accounts for about 80% of its total sales, has a loyal customer base and a diversified product portfolio that caters to various consumer needs and preferences. In my view, this helps the company diversify revenue generation avenues, which will help mitigate some financial risks. Further, the diverse portfolio will help the company stay relevant in a world dynamic consumer needs and reach a broader market, which I believe bodes well for the company’s top and bottom lines.
Another reason why I am optimistic is because the company has been improving its financial position and cash flow generation, as evidenced by its fiscal 2023 full-year results. The company reduced its net debt by $1.2 billion, increased its free cash flow by $1.1 billion, and achieved $125 million in cost savings from its Project Springboard initiative. It also maintained its dividend payment of $0.66 per share.
Further, the company has been exploring strategic alternatives for its Hawthorne segment, which is focused on the indoor and hydroponic growing market. This segment, which accounts for about 20% of its total sales, has faced challenges due to regulatory uncertainties, market saturation, and pricing pressures in the cannabis industry. However, the company believes that this segment has long-term growth potential, as the cannabis market is expected to grow at a CAGR of 24.3% from 2022 to 2027. I believe this projected growth bodes well for this segment as it could result in improved revenues.
However, some risks and uncertainties could affect the company’s performance and outlook, explaining why I am cautiously optimistic. These risks and uncertainties include:
- The seasonality and weather dependency of its U.S. Consumer segment may cause fluctuations in its sales and earnings depending on the timing and extent of consumer demand for its lawn and garden products. The company’s sales declined by 9% in fiscal 2023 compared to fiscal 2022, mainly due to unfavorable weather conditions and lower consumer spending.
- The company’s high debt level and dividend payout ratio may constrain its financial flexibility and ability to invest in growth opportunities. The company’s debt-to-equity ratio is about 25, which is very alarming in my opinion. Further, its dividend payout ratio is 139.68%, which means that it distributed more cash to its shareholders than it generated from its operations, which is quite unsustainable in my view.
Seeking Alpha
In conclusion, I think that the company’s stock price may experience some volatility in the near term as the market reacts to its quarterly earnings reports and any updates on its strategic plans for its Hawthorne segment. However, I also think the company’s stock price may be appreciated in the long term as it leverages its strengths and opportunities in the lawn and garden industry and the indoor and hydroponic growing market.
Technical Analysis
This section covers my technical analysis for SMG based on several indicators. To begin with, is the price trend. MG’s stock price has shown significant volatility over the past year, with a 52-week high of $88.61 and a low of $43.67. The recent surge in price (21% yesterday) after the fiscal 2023 full-year results indicates a positive market reaction to the company’s performance. Additionally, the trading volume for SMG has been relatively high, with an accumulated volume of 2,779,982 as of the last trading day(November 1, 2023). This suggests strong investor interest in the stock.
Considering the moving averages, its current price is below its 50-day moving average but above its 200-day and 100-day moving averages, which can be interpreted as a potential turnaround or correction phase after a longer-term downtrend.
Now, let’s look at the oscillators. The MACD indicator shows that the bearish momentum is weakening as the MACD line converges with the signal line, and both lines move towards the zero line. The MACD histogram is likewise decreasing, showing a possible reversal. Furthermore, the relative strength indicator [RSI] indicates that the stock is neutral and not overbought or oversold, as the RSI line is at 49.6, showing that the market is currently neutral on the stock, and a break could go either way depending on the prevailing conditions. The current affairs could trigger an uptrend in the RSI, signaling a bullish trend, which could be confirmed by a break above the MACD zero line.
Lastly are the support and the resistance levels. Support levels are where a downtrend can be expected to pause due to a concentration of demand. Resistance levels are where an uptrend can pause temporarily, given a concentration of supply. For SMG, key short-term support may be found near its recent lows around $43.67, while resistance may be encountered near the $88.61 range. However, the long-term support and resistance levels are $49.16 and $253.47 respectively.
Looking at the share prices, it appears that it bounced on the support level, but the bouncing was weak, and a retest appears apparent. Should a retest bounce, I recommend short-term investors buy the shares at about $55 and set stop losses below $49.16. They can take a profit at about $88.61 range and reevaluate the trend. For long-term-oriented investors, I would advise a buy decision if the price breaks above the short-term resistance level at about $88.61, which I consider a confirmation of a long-term bullish trend. By that time, all indicators should have been clear on a bullish trajectory.
Bottom Line
My research leads me to cautious optimism about SMG because of risks that I think may jeopardize the stock’s promising future. I advise patience while we wait for the uncertainties surrounding the company’s prospects to dissipate, perhaps when the new management aligns the organization with its objectives.
For further details see:
The Scotts Miracle-Gro Company: Cautiously Optimistic, I Recommend Patience For Now