(Photo Credit - Mike Mozart)
Wall Street loves Scotts Miracle-Gro (NYSE:SMG) because it's a Jeff Sessions-proof stock to still get a little play on the booming cannabis industry. The company doesn't touch the plant, but has invested heavily in the space. The company's Hawthorne Gardening Co. subsidiary purchased General Hydroponics Inc. for $130 million in 2015, and went deeper into the hydroponics market with a major stake in the at-home hydroponic systems company AeroGrow International (OTC:AERO).
The company's cannabis-focused Hawthorne subsidiary now has a handful of brands in its portfolio, all targeted at cultivation, and Wall Street has loved it. As of recent 13F filings, institutional ownership of Scotts is up over 71%. This may be subject to change soon, since Scotts reported Q2 financials on Tuesday, and the company missed on earnings and revenue.
Mother Nature's Fault
This earnings release had an initial sugar-coating, with the company announcing "the pending sale of its European and Australian businesses, a major step in its continued execution of ‘Project Focus.'"
After that, the release started to dig into the Q2 financials and why they missed...
"...company-wide sales declined 3 percent to $1.20 billion..." due to "challenging comparisons versus favorable early spring weather in 2016," which was the same excuse used by "Macy's, Dick's Sporting Goods, Uniqlo..." and more this winter, according to Business Insider.
"Those same challenging comparisons," (weather) "resulted in GAAP earnings per share of $2.73 versus $3.64 and Non-GAAP adjusted earnings per share of $2.78 versus $3.00 a year ago."
Hydroponics Pulled Its Weight Though
Following the bad news, CEO Jim Hagedorn, was quoted saying:
“We expected a difficult comparison through the first half of the year and we are confident in how we are positioned for the balance of the season. We also remain pleased with the continued double-digit growth so far this year in our hydroponics products sold by the Hawthorne Gardening business.”
Candid Conference Call
Then came the conference call, where Hagedorn initially advised listeners "to avoid getting overly focused on the absolute results for Q2." Once he got onto talking about Hawthorne, we were interested...
"you'll see organic growth for Botanicare of 13% in the quarter and 12% year-to-date. Gavita is up 33% in the quarter and 18% year-to-date. When you layer-in General hydro and AeroGrow, both up double digits as well, unit volume for the entire hydroponics portfolio was up 22% for the quarter, which leaves us up 13% through 6 months. The overall landscape continues to look positive for Hawthorne. We would expect to see new sales opportunities to start to emerge in markets in the Eastern United States like Florida, Ohio, Maryland and Massachusetts in the quarters ahead. And we continue to expect more opportunities coming from an already strong West Coast markets like California."
Followed by a hint-drop about M&A deals...
"we've been exploring some growth opportunities for Hawthorne in recent months that would lead to further expansion of their portfolio and allow us to appeal to a broader range of customers. We expect to complete most of these deals by the end of the year."
Unfortunately, the good news about hydroponics wasn't enough to keep Wall Street satisfied enough to hold on. Shares of SMG closed at $97.10 on Monday, and the company released earnings before the opening bell on Tuesday.
On Tuesday, SMG opened the trading session at $93.20. Shares bounced back above $94.50 before the bears came in, forcing Scotts to close down at $91.22. On Wednesday the selling continued, closing down at $88.80.
Today at the time of writing this, SMG is up 15 cents per share on slightly-above-average volume.
We're happy to hear that the company's decision to invest in becoming a leader in the ancillary marijuana space is paying off. It's too early to tell if the street will trim positions in Scotts, but the charts are looking really bearish. One of Wall Street's other cannabis-related darlings is GW Pharmaceuticals (NASDAQ:GWPH), which reports earnings on May 9th. The chart is not looking so hot for GWPH either...
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.