Scotts Miracle-Gro "Gros" Earnings

By Greg Sushinsky | August 17, 2010 AAA

The Scotts Miracle-Gro Co. (NYSE:SMG) grew earnings by 19% in its fiscal third quarter, driven by cost containing and pricing. Revenue edged up slightly. The company doubled its dividend and authorized a four-year share buyback program.

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Growing Profits
Net income grew to $175.9 million, or $2.59 a share, from $147.8 million, or $2.24 a share, in last year's same quarter. Revenue was $1.24 billion, compared to $1.23 billion in the third quarter a year ago. With an adjustment for a calendar shift, however, revenue rose 5%.

BMO Capital Market's analyst Connie Maneaty noted the company's performance is clicking in all areas. The company has a "healthy flexibility," with efficient capital spending, a good product pipeline, along with solid sales growth. Scotts has potential with its new lawn product, EZ Seed, which this year could produce double or nearly triple the $25 million in revenue it generated in 2009.

With the strong earnings, potential sales increase and promising product line, Scotts increased the dividend to 25 cents a share and authorized $500 million for its four-year share repurchase program.

Agricultural Landscape
Economic and investing news on the agriculture (ag) front is usually dominated by the bigger companies. Scotts, though, has a $3.3 billion market cap, and occupies a unique niche with its retail consumer agriculture, lawn and garden products. Large commercial fertilizer producers such as Agrium (NYSE:AGU) and CF Industries Holdings(NYSE:CF) have shown the boom-and-bust cycle in their industry with wildly fluctuating earnings. This fluctuation has been less dramatic for Scotts in the consumer end of the business. Giant seed producer Monsanto (NYSE:MON) has fared better than the commercial fertilizer makers in terms of riding out this agricultural cycle of highly variable earnings, while diversified chemical maker Dow Chemical (NYSE:DOW), which has a hand in the ag business, weathered the falloff reasonably well. Although we may be in the nascent period of the next pickup for worldwide commercial agriculture, Scotts' consumer niche is still a good place to be.

Scotts Prospects
The company has a solid niche without an equivalent rival in the consumer field. This not only positions it well, but gives it a lot of leeway in a still weak economy. The company has done a good job of cost cutting through this recession, yet is still developing new products. It also deploys a surprising array of products and services, from products for do-it-yourself consumers to professional lawn care service. The company has room to grow in its lightly challenged space.

Scotts Stock
Scotts earnings estimate for the full year is $3.25 per share. The stock currently trades near its 52-week high at a P/E just under 15 and a forward P/E at just over 13. Its current yield, with the dividend increase, puts it at slightly over 2%. The stock is a bit pricey for now, but this is usually a quiet, under-the-radar stock that investors should consider for their portfolio when priced more favorably to buy. (Whether you want funds or stocks, find out how to evaluate planet-friendly portfolio picks. Check out Evaluating Green Equity Investments.)

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