BofA: Scotts Miracle-Gro Faces Too Many Near-Term Risks

Scotts Miracle-Gro Co (NYSE: SMG)'s second-quarter report convinced Bank of America Merrill Lynch to switch from a bullish to a bearish stance on the lawn and garden company. 

The Analyst

BofA's Christopher Carey downgraded Scotts Miracle-Gro rating from Buy to Underperform with a price target slashed from $100 to $80.

The Thesis

Scotts Miracle-Gro's Q2 print shows multiple near-term risks that put an end to BofA's bullish thesis, Carey said in the downgrade note. (See the analyst's track record here.) They are: 

• The company faces an "atypically" cold start to the garden season exacerbated by tight inventory management at the retail channel.
• Higher transportation costs resulted in an 8-percent profit miss.
• A reduction in Scotts' fiscal 2018 guidance is expected in its June investor update.
• Margin headwinds for fiscal 2019 include commodity prices, distribution costs and the reversal of employee comp.

The long-term setup for Scotts Miracle-Gro remains unchanged, Carey said. The company is still a leader in the hydroponics space, which will likely see outsized growth versus its core business, he said. The U.S. consumer business will contribute a "stable base" of modest earnings growth and strong free cash flow generation, the analyst said. 

Scotts Miracle-Gro's near-term headwinds outweigh the longer-term picture, according to BofA. 

The firm's revised $80 price target for Scotts is based on a 17x multiple on calendar 2019 EPS, down from a prior 22x multiple.

A premium multiple is no longer justified, as there are few near term catalysts; M&A deals have already been announced; and the visibility on a turnaround in Hawthorne is still low, Carey said. 

Price Action

Scotts Miracle-Gro shares were down 7.85 percent at $77.97 at the time of publication Wednesday afternoon.  

Related Links:

Benzinga's Top Upgrades, Downgrades For May 2, 2018

Pot Stocks, ETFs, Top News And Data From The Cannabis Industry This Week