Here's Why Scotts Miracle-Gro Co. Stock Fell 16% Today

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What happened

Shares of Scotts Miracle-Gro Co. (NYSE: SMG) were down 15.5% today, as of 1 p.m. EST, following release of the company's first-quarter earnings report before market open. Scotts reported a sales increase of 7%, a loss from continuing operations of $0.35 per share on a GAAP basis, and a loss of $1.08 per share on an adjusted basis.

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So what

Scotts Miracle-Gro essentially always reports a loss in the first quarter, due to the seasonal nature of its business. So while many investors were expecting the loss, it may be the size of the loss that has them selling today. The adjusted result, which is what Wall Street tends to focus on, was a good bit worse than the average $0.92-per-share loss analysts were expecting.

There's more that has investors heading for the exits. A big expected growth driver for Scotts in recent years has been its Hawthorne Gardening Co. subsidiary, which caters to the cannabis industry. Sales at Hawthorne were up 20%, but that was entirely due to acquisitions, while organic sales were flat. Even more concerning for many investors is that, while management continues to say that they view "the recent slow down within Hawthorne as temporary," CEO Jim Hagedorn conceded that the slowdown has continued into the current second quarter.

Now what

It's not all bad news. The company raised its full-year earnings guidance to $4.60-$4.80 per share, up from $4.15-$4.35 per share, thanks to lower corporate taxes as passed in 2018. But even that positive came with more weakness. Scotts reduced its guidance for sales in 2018, now expecting sales to grow only between 2% and 4% for the full year. This was mostly due to the "slow start" at the company's Hawthorne subsidiary.

Even after today's big decline, Scotts Miracle-Gro's shares trade for almost 20 times the low end of its adjusted earnings guidance. That's a pretty steep premium considering the company's struggles to establish growth outside of acquisition, even in the potentially big cannabis industry.

There's still potential, but it seems investors would do well to watch from the sidelines for now -- until there's more evidence that Hawthorne can consistently drive earnings growth, or the company's shares trade at a more reasonable valuation to its growth prospects. Right now, it's just not certain which way things will go.

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Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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