You might think The Scotts Miracle-Gro Company (NYSE: SMG) would be a boring stock in a boring business. After all, lawn and garden care usually doesn't generate a lot of buzz among investors. However, 2016 was one of the best times ever to own Scotts Miracle-Gro stock. Shares soared nearly 50%. Granted, 2017 has been a yawner for the most part for Scotts stock. Although its share price dropped by more than 10% earlier this summer, Scotts stock is now up slightly year to date.
Still, though, the company has attracted a lot more attention recently for one reason: the rapid rise of the U.S. marijuana industry. Scotts Miracle-Gro has become one of the most intriguing "marijuana stocks" on the market. Here are three things you need to know about the company.
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1. Why it can be categorized as a marijuana stock
No, Scotts Miracle-Gro doesn't grow or sell marijuana in any shape, form, or fashion. However, it's frequently referred to as a marijuana stock. Why? Because Scotts has become the go-to supplier of key products needed by marijuana growers. The company markets fertilizers, hydroponics, and lighting systems that are essential for growing healthy marijuana crops.
Scotts Miracle-Gro has been aggressively going after the cannabis market. The company's subsidiary, The Hawthorne Gardening Company, has made several key acquisitions over the last couple of years to build up its hydroponics business. In 2016, Hawthorne bought American Agritech, L.L.C., an Arizona-based leading producer of plant nutrients, plant supplements, and growing systems used for hydroponic gardening, and Gavita, a Netherlands-based marketer of indoor lighting used in the greenhouse and hydroponic markets. More recently, the company acquired lighting systems supplier Agrolux.
It's been said that back in the gold rush days in California, Alaska, and elsewhere, the people who made the most money weren't the gold miners themselves; instead, it was the ones selling shovels and supplies to those gold miners. That's a good way of looking at Scotts Miracle-Gro today, except now there's a "green rush" instead of a gold rush.
2. Where it makes its money
Scotts Miracle-Gro is enjoying nice growth from Hawthorne's premiere status in the marijuana industry. However, that's not where the company makes most of its money.
Scotts is organized into three business segments: U.S. consumer, Europe consumer, and other. The first two segments include the company's consumer lawn and garden products in their respective geographies. Scotts' other segment includes its Hawthorne subsidiary, which sells indoor, urban, and hydroponic gardening products, and consumer lawn and garden products sold outside of the U.S. and Europe.
The U.S. consumer segment is by far Scotts' biggest moneymaker, generating 73% of total sales in the second quarter of 2017. The segment with Hawthorne comes in second, accounting for nearly 18% of total revenue. Scotts' Europe consumer segment kicks in the remaining 9% of sales.
When it comes to profits, though, the company's U.S. consumer segment is even more important. The segment generates nearly 87% of Scotts Miracle-Gro's total profit.
3. Challenges and opportunities
Scotts Miracle-Gro faces several key challenges in the days ahead. The company's products compete with private-label brands offered by big retailers like Wal-Mart. Scotts' sales are highly dependent on weather conditions. The company has also been lagging its peers in cash-flow productivity.
Successfully integrating the acquisitions made by Hawthorne is another challenge. The Hawthorne segment currently operates with a lower margin than the rest of Scotts' business. Perhaps the biggest risk for Hawthorne is the possibility that growth in the U.S. marijuana industry could be stifled as a result of federal crackdowns in states that have legalized medical and/or recreational marijuana.
However, Scotts Miracle-Gro also has several big opportunities before it. The company has expanded into selling live plants and rodenticides, both of which have higher growth trajectories than its core business. Warmer weather trends could potentially increase growing seasons, which would likely boost sales of Scotts' lawn and garden products.
Then there's the great prospects in supplying products for the cannabis market. Scotts thinks it will be able to tie all of the businesses that its bought together under the Hawthorne umbrella to create a much more profitable organization. The potential legalization of recreational marijuana in Canada and possibilities for expanded legalization of marijuana in more U.S. states present significant pathways for sustained growth for Hawthorne.
Scotts Miracle-Gro might not meet the purists' definition of marijuana stock. However, there's no doubt that the company has hitched its wagon to the marijuana industry. As the market for marijuana goes, so goes Scotts Miracle-Gro.
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