Multi-Bag Strategy And New Products Will Drive Efficiency

Key Takeaways

• Transitioning to a multi-bag strategy and new product introductions are expected to drive revenue and improve gross margins in the consumer segment.
  
• Divesting Hawthorne businesses and cost-reduction initiatives aim for improved financial flexibility, reduced volatility, and enhanced net margins.
  
• Exiting third-party distribution and the cannabis sector may stabilize volatility but could limit future growth amidst declining sales and rising SG&A expenses.

Catalysts

Engages in the manufacture, marketing, and sale of products for lawn, garden care, and indoor and hydroponic gardening in the United States and internationally.

• The transition to a multi-bag strategy in the lawns division indicates a shift in focus towards encouraging consumers to purchase more units, which is expected to positively impact revenue and gross margins as the company aims to increase the frequency of consumer purchases.
  
• The introduction of new products, such as the expanded Miracle-Gro organic line and new flying insect traps, along with increased marketing efforts and retailer promotions, is expected to bolster revenue growth in its consumer segment.
  
• The divestiture of Scotts' Hawthorne businesses aims to reduce volatility from the cannabis sector and could lead to improved gross margins and enhanced financial flexibility, creating a clearer path to achieving their EBITDA target.
  
• The company's transformation initiatives, targeting over $75 million in supply chain cost reductions this year and $150 million by fiscal '27, are designed to improve net margins by creating a more efficient and cost-effective operational structure.
  
• The increased promotional activity and strategic partnership with retailers, focused on activating consumers and driving store foot traffic, is expected to support revenue growth and enhance market share for Scotts Miracle-Gro's products.

Scotts Miracle-Gro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scotts Miracle-Gro's revenue will grow by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $336.2 million (and earnings per share of $5.65) by about May 2028, up from $36.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, down from 86.8x today. This future PE is lower than the current PE for the US Chemicals industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 1.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

Scotts Miracle-Gro Future Earnings Per Share Growth

Risks

• The decline in total company net sales by 7% for the quarter and 5% year-to-date suggests potential challenges in maintaining revenue growth, particularly if this trend continues.
  
• The exit from third-party distribution by the Hawthorne division and the significant decline in its net sales (51% for the quarter) could indicate ongoing revenue and market share challenges in this segment.
  
• Efforts to drive initial unit growth through heavy promotional activity may put pressure on net margins if the promotions are not sustainably offset by volume gains or cost efficiencies.
  
• The plan to divest the Hawthorne division focuses on reducing volatility, but it also involves exiting a growth area in the cannabis sector, which might limit future revenue expansion opportunities should the market recover.
  
• The increase in SG&A expenses by 5% for the quarter and 7% year-to-date due to higher performance-based incentives and investments could impact net earnings if revenue growth does not sufficiently cover these costs.

Valuation

• The analysts have a consensus price target of $69.714 for Scotts Miracle-Gro based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $54.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.6 billion, earnings will come to $336.2 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $54.5, the analyst price target of $69.71 is 21.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.