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Scotts Miracle-Gro (SMG) Plunges After Full-Year Guidance Withers

By: , dated June 14th, 2012

Shares of Scotts Miracle-Gro (SMG: Charts, News), the company best known for its namesake lawn and garden care products, plunged over the past two days, after it warned that it would miss its full year guidance for fiscal 2012. The Marysville, Ohio-based company now expects to miss its full year adjusted earnings target of $2.65 to $2.85 per share, as well as its sales growth target of 6% to 8%. This disappointed investors who had seen the company’s 8% sales growth entering May as a positive catalyst for the stock. Year-to-date, however, sales only grew at an anemic 3%. Analysts had forecast full year adjusted earnings of $2.80 per share on revenue of $3.07 billion. The company attributed its weak revised forecast to poor sales and an “unfavorable” product mix, and will provide updated results along with its full third quarter earnings report in August.

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Sluggish consumer demand, exacerbated by weak home sales in the United States, has significantly weakened the market for lawn and garden care products. The second quarter of the year, during the spring, is considered the start of the lawn care and gardening season, while mid to late May is considered its peak. Scotts Miracle Gro’s weak May numbers have scared off many skittish investors, still nervous over the uncertain direction of the volatile markets. The company predictably noted that adverse weather and an unstable economic environment would weaken its European business and cause the segment’s earnings to fall far short of expectations. Poor sales of flowers and vegetables also dented demand for the company’s products. Lastly, the company’s gross margins are expected to contract due to unfavorable product mix and unplanned distribution costs, which stem from the stronger-than-expected performance of its controls and mulch businesses. Higher promotion costs are also likely to hit operating margins.

Although CEO Jim Hagedorn, stated that he was “clearly disappointed” with the company’s reduced guidance, he focused on the company’s strengths. “We have seen unit growth in consumer purchases of our lawn fertilizer products for the first time in several years,” he stated. “Our controls businesses – where growth in consumer purchases has been in the high teens – are having their best season ever. In addition, our mulch business has grown by about 25 percent through the first seven months of the year.”

Scotts Miracle-Gro operates in three segments – Global Consumer, Global Professional and Scotts LawnService. Through these businesses, the company caters to agricultural, residential and commercial properties. Its businesses are primarily located in North America and the European Union. It does not have a significant presence in Asia or other emerging markets. The company generates approximately $3 billion in sales annually. While the short term forecast for lawn and garden products remains negative, longer term sentiment is positive, especially in chemicals and fertilizers, which will be increasingly in demand as the global population rises and the amount of arable land decreases.

Shares of Scotts Miracle-Gro have shed 23% of their value over the past twelve months, despite a 4% increase in the S&P 500. The stock is trading at 12.3 times forward earnings with a 5-year PEG ratio of 1.4, and pays a quarterly dividend of 30 cents per share – a 3% yield at today’s prices. The dividend has increased steadily since being introduced six years ago.

Other News About SMG
Scotts Miracle-Gro expects to fall short of 2012 sales goals
Scotts Miracle-Gro cuts its guidance, and shares plunge.
Scotts Miracle-Gro sell-off a buying opportunity, says BGB Securities
At least one analyst remains bullish on the company’s growth prospects. Other Stocks in the News
McDonald’s Sales Drop in Asia Signals Fast-Food Slowdown
Is McDonald’s drop a buying opportunity?
Yum Brands falls on China worries
Yum shares slide as China bulls fade.

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Leo Sun Leo Sun

is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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