Scotts Miracle-Gro Downgraded On Projected 2019 Headwinds

The tailwinds for Scotts Miracle-Gro Co SMG do not appear to outweigh the company's coming headwinds, according to Raymond James. 

The Analyst

Raymond James analyst Joseph Altobello downgraded Scotts Miracle-Gro from Market Perform to Underperform.

The Thesis

The downgrade for Scotts Miracle-Gro comes on view that Wall Street expectations are too bullish amid numerous near-term challenges faced by the fertilizer maker, Altobello said in a June 20 note.

Raymond James lowered its fiscal 2019 adjusted EPS estimate from $4.80 to $4.50.

“While this still represents a healthy 17-percent year-over-year increase over our fiscal 2018 estimate, all of this improvement relates to the recent acquisition of Sunlight Supply, with no meaningful base business improvement expected,” Altobello said.

Altobello named the following as looming headwinds for Scotts:

• The elimination of a $20 million annual payment from Monsanto/Bayer under a revised 2015 marketing agreement.
• An additional $20 million in commodity and transportation costs.
• An additional $20 million in incentive compensation expense.
• An additional $20 million in wage and benefit inflation.

The $80 million in EBIT headwinds for fiscal 2019 equate to $1.05 per share, the analyst said. 

Scotts Miracle-Gro's tailwinds amount to less than $60 million in incremental EBIT, meaning the company needs $15-$20 million in order to reach its revised EPS estimate, Altobello said. 

The analyst put a base valuation of $77 on Scotts, but said if cost pressures worsen or cost savings do not materialize, a $68 valuation is possible. 

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