史考特园艺

Scotts Miracle-Gro reported mixed results as revenue growth was partially offset by higher commodity input and freight costs.

Why it matters: Scotts shares were down 7% on July 29 at the time of writing as the market reacted to cost inflation weighing on profits and management's outlook for revenue growth to come in at the low end of its guidance range, which is below FactSet consensus estimates. Scotts' results are beginning to be impacted by higher energy, fertilizer, and commodity chemicals prices as a result of the Middle East conflict-driven supply shock. We see a smaller impact in fiscal 2026 but expect it will be larger in 2027 and forecast profits to decline as a result. Management cited unfavorable spring weather as a driver for slower sales growth this year but expects sales will accelerate next year. We see small sales growth as Scotts will likely raise prices to pass along cost inflation but expect it to weigh on volumes.

The bottom line: We maintain our $80 fair value estimate for narrow-moat Scotts Miracle-Gro. We view Scotts shares as fairly valued, with the stock trading in 3-star territory. As such, we recommend that investors wait for shares to offer a larger margin of safety before considering an entry point.

Coming up: On Aug. 4, Scotts will host its investor day event, where new CEO Nate Baxter will share his strategy. We hope to hear details on how Scotts will accelerate revenue growth and expand profit margins over the next few years. For now, we maintain our Poor Capital Allocation Rating for Scotts, but we will revisit after hearing management's updated strategy and evaluating its execution in dealing with cost inflation over the next year.

For more information on our long-term outlook for Scotts Miracle-Gro, please see our 2024 Stock Pitch.

We maintain our $80 fair value estimate following the company's fiscal third-quarter results. We use a roughly 7.5% weighted average cost of capital.

In the US consumer segment, we forecast sales will return to small growth in fiscal 2026 on higher volume. While we see small growth in fiscal 2027 as well, we see lower margins as a result of fertilizer and energy cost inflation. Scotts should be able to pass along most of the price increases, but will likely see lower volume as a result. In the longer term, we expect the segment to benefit from normalized volume and improving margins as input costs fall and prices remain somewhat stable.

Our forecast for US housing starts to average 1.4 million-1.5 million per year over the next decade drives our long-term outlook. This should increase demand for Scotts’ products over the next several years. We assume Scotts will be able to raise prices in line with inflation. We forecast roughly 3%-4% average annual revenue growth through fiscal 2033 as Scotts expands into e-commerce, signs partnerships to sell new products, and targets more professional lawn and gardening customers. This is in line with management's growth initiatives. We assume segment profit margins expand to the low 20s but remain below prepandemic levels in the mid-20s. While management aims to make some acquisitions of new gardening products, we do not model any deals until announced.

In a downside scenario, we assume little sales growth and lower margin recovery versus our base case. Our fair value estimate would fall to $50 per share.

We award Scotts Miracle-Gro a Narrow Morningstar Economic Moat Rating due to intangible assets stemming from the company’s strong brands that generate pricing power in the US consumer segment, which generates the vast majority of profits. As a result, we believe that Scotts will more likely than not generate a return on invested capital above the cost of capital for at least the next 10 years.

The US consumer segment benefits from strong and recognizable brands, entrenching Scotts as the US gardening leader, with the highest market share. The company’s brands include Scotts, Miracle-Gro, Roundup, Ortho, and Tomcat. These products are sold at a premium price versus private label competitors, while Scotts has maintained its market leadership, demonstrating that Scotts’ brands translate to pricing power. As a result, Scotts Miracle-Gro has created stable relationships with leading US home improvement retailers Home Depot and Lowe’s, which combine to make up nearly 50% of revenue for Scotts. While this creates some customer concentration risk for Scotts, these two home improvement retailers have accounted for around 50% of Scotts’ sales for over 20 years. We think Scotts’ strong marketing and branding create a mutually beneficial relationship between the company and the home improvement retailers, and we expect Scotts will continue to command premium shelf space in these stores for the foreseeable future.

In addition, Scotts Miracle-Gro boasts an exclusive agreement to sell Monsanto’s consumer Roundup-branded products. This agreement has been in place since 1999. We do not see any reason for it to terminate because it is mutually advantageous: Bayer (Monsanto) gets to leverage Scotts’ powerful retail relationships, while Scotts sells a popular product. Roundup is one of the only weed killers available for consumers that contains commercial-quality chemicals, and this effectiveness creates consistent demand from consumers who aim to create aesthetically pleasing outdoor spaces. The agreement and its longevity support Scotts’ consumer segment, which helps the company maintain return on invested capital above the cost.

The US consumer segment’s sales are strongly influenced by the total number of owner-occupied housing units in the US based on US Census Bureau data, with an adjusted R-squared of 0.83. Given our outlook that total owner-occupied housing units will continue a steady upward trend over the next 10 years, Scotts is well positioned to benefit from this future.

Household and personal care product moats are based on brand intangible assets, which applies to Scotts Miracle-Gro. Scotts’ strong branding will allow the company to continue to add slow and steady pricing premiums to its products, while its customers continue to buy them. Scotts has historically been able to steadily raise prices to at least pass along cost inflation while maintaining market share. Scotts benefits from US gardening consumers' willingness and ability to pay up for premium products as the majority of gardeners in the US are more affluent, earn above the median income, own homes, and prioritize creating a beautiful outdoor space as the main reason for gardening. Scotts' marketing and product innovation make its brands top of mind for consumers, allowing the company to maintain its premium prices.

We expect Scotts will continue to generate positive economic profits, earning a Narrow Moat Rating.

US household formation growth will drive demand for gardening products. As the market leader in consumer gardening products, Scotts will benefit from the secular housing trend.

Consumer behavior has changed following the covid-19 pandemic, with more consumers engaging in gardening as an activity. As the largest player in the consumer gardening market, Scotts will benefit from this change through higher long-term volumes.

Scotts is investing in expanding its gardening portfolio, which will lead to market share gains and stronger growth over time.

While the recreational gardening industry is growing, consumers will increasingly prefer cheaper private-label and generic products, reducing Scotts' market share over time.

US gardening is a low-growth business, and Scotts will underperform management's long-term guidance.

Management's acquisitions have historically been value-destructive, leading to a large risk of future value destruction from additional acquisition activities.