Scotts Miracle-Gro Earnings: Stock Tanks Despite Solid Results

Key Morningstar Metrics for Scotts Miracle-Gro

• Fair Value Estimate: $90
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Scotts Earnings

In Scotts Miracle-Gro’s fiscal third quarter, the US consumer segment’s net sales grew 1% and gross margin jumped over 200 basis points. However, the market reacted negatively to the firm missing revenue and gross profit expectations for the quarter, with the stock trading down 10%.

Why it matters: Despite the negative reaction, the results indicate that the firm is continuing on its path toward 3% long-term sales growth and 35% gross margin. This would restore Scotts’ profit growth from the net sales’ double-digit decline in 2022 and the gross margin’s 19% low point in 2023.

• These results line up with our thesis that Scotts will generate long-term growth. We expect Scotts to maintain current price levels and absorb rising cost increases, and invest in its premium products to drive volume growth.
• One growth plan is the firm’s R&D investment. R&D, in creating new and premium organic products, works to attract new customers and supports the firm’s brand intangible asset that underpins our narrow moat rating.

The bottom line: We maintain our $90 fair value estimate for narrow-moat Scotts Miracle-Gro. We think the market continues to undervalue the firm’s growth outlook and is skeptical of the firm’s targets; the stock is trading at almost 40% below our fair value estimate.

• In our view, the stock offers investors a unique opportunity for long-term US gardening growth. We see a strong predictive relationship between US housing growth and Scotts sales. US housing growth should drive Scotts’ sales and profits higher in the coming years.