Mother Nature Sends Scotts Tumbling

By Ryan C. Fuhrmann | June 15, 2012 AAA

Scotts Miracle-Gro (NYSE:SMG) considers itself one of the largest lawn and garden care companies on the planet. Unfortunately, that means much of its demand depends on the weather, which is anything but predictable. Mother Nature appears to have continued her uneven streak so far this year, and caused Scotts to pull its financial guidance until next quarter.

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Recent Developments
On Tuesday after the market close, Scotts updated its full-year sales and profit guidance. Management cited a "slowing consumer demand following a strong and early start to the lawn care season in the second quarter," as well as a gardening season that has disappointed in terms of product sales. It didn't provide specific guidance and only stated it plans to fall short of its goals of a 6 to 8% sales growth and earnings in a range of $2.65 to $2.85 per share. This compares to $2.76 in fiscal 2011. Scotts plans to offer more details during the third quarter earnings update.

This year was already targeted as an "investment year" by which the company planned to increase its advertising spending and hold back on price increases to offset the higher costs for raw materials that go into its fertilizers, potting soil and other lawn and garden products.

SEE: Can Earnings Guidance Accurately Predict The Future?

Market Landscape
Scotts' fortunes continued to be controlled by Home Depot (NYSE:HD), Lowe's (NYSE:LOW) and Wal-Mart (NYSE:WMT). Last year, 61% of sales stemmed from these three retail giants, with the specific breakdown at 30, 18 and 13%, respectively. Beyond the customer concentration, the company is far and away a leader in most of the product categories it serves. ServiceMaster's TruGreen segment is a competitor, as is Central Garden & Pet's (Nasdaq:CENT) lawn and garden segment.

The Bottom Line
Scotts' stock took a significant tumble following the lowered guidance. It fell right through its 52-week low to below $37 per share. At the current price of roughly $39.83, the forward P/E has fallen into a much more reasonable territory, though the exact level remains uncertain until the company offers a more specific guidance. Using the trailing earnings figure, the P/E was reasonable at around 13.3. The company may want to consider refraining from guidance at all, because it's just too difficult to determine how the weather is going to affect demand in any given quarter. Judging by the market's overly severe reaction, it doesn't appear to understand this, either.

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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