Raymond James Upgrades Scotts Miracle-Gro On Valuation

Shares of lawn and garden product maker Scotts Miracle-Gro Co SMG are trading near multi-year lows, which creates an opportunity for investors after a "tough" but not a "complete disaster" of a year, according to Raymond James.

The Analyst

Raymond James' Joseph Altobello upgraded Scotts Miracle-Gro from Underperform to Outperform with a new $71 price target.

The Thesis

Scotts Miracle-Gro faced multiple challenges in 2018, Altobello said in a note. These include:

• A late start to the lawn and garden season in most of the country.
• Cannabis subsidiary Hawthorne Gardening suffering from a slow pace of implementation in California.
• Rising commodity and distribution costs.
• A dilutive impact from the acquisition of Sunlight Supply.
• Negative impact to its brand as part of its relationship with Bayer, which faces lawsuit related to its active ingredient glyphosate.

There were several positive developments for the company in 2018. These include:

• Point-of-sale takeaway up 3 percent within the home center and hardware channels.
• A positive POS in other categories (branded fertilizers, grass seed, and others).
• The trend towards cannabis legalization moved in a positive direction.

Cannabis investors can't miss the Benzinga Cannabis Capital Conference, the No. 1 networking event for institutional capital and the leading cannabis companies. Secure your tickets here before they run out.

The company faces its share of headwinds and tailwinds, but Altobello said the stock's valuation favors the bullish case. Specifically, the firm's $71 price target is based on a multiple of 16.5 times calendar year 2019 EPS estimate, which is below the stock's recent historical multiple of 18 times. The discounted valuation reflects a more levered balance sheet and a slowdown in the Hawthorne business.

Price Action

Shares of Scotts Miracle-Gro were trading higher by 1 percent Monday to $64.05.

Related Links:

Scotts Miracle-Gro Downgraded On Projected 2019 Headwinds

SunTrust Sees 22% Upside In Scotts Miracle-Gro, Upgrades To Buy