Earlier this week, Scotts Miracle-Gro (SMG) released third quarter financial results that came in well above Wall Street estimates the business reported continued strength from both its US Consumer and Hawthorne segments.
The outperformance of these two divisions resulted in Scotts reporting a 28% increase in sales growth and a 22% improvement in non-GAAP adjusted earnings. One of the most significant parts of the earnings result is related to how Scotts raised its guidance for full-year sales, adjusted earnings and free cash flow.
Leading Wall Street broker-dealers responded favorably to the quarterly earnings report and a few banks raised their price target on Scotts Miracle-Gro. SunTrust Robinson raised its price target to $180 from $155. JP Morgan raised its price target to $160 from $136 and we are favorable on the upside that is implied by SunTrust’s updated price target.
During a time where many companies are cutting dividends, Scotts Miracle-Gro reported a $5 per share special dividend and increased its regular quarterly dividend by 7%. The market responded very favorably to the financial results and the stock rallied more than 10% on the report.
We consider Scotts Miracle-Gro to be one of the best positioned ancillary cannabis company. So far this year, the company’s US Consumer segment accounted for $2.33 billion of sales (which represents approx. 15% growth when compared to the same period last year. Scotts’ Hawthorne division represented a major growth driver in the quarter and this is a trend that we are bullish on. So far this year, Hawthorn has recorded a 59% increase in sales and we will monitor how the division continues to ramp up.
Another important aspect of the earnings report is related to Scotts’ revised sales guidance of 26 to 28% growth. The guidance assumes that the US Consumer segment will grow 20% to 22% while Hawthorne sales will increase by 55% to 60%. Entering June, the company said it expected U.S. Consumer sales to increase by 9% to 11% while Hawthorne was expected to increase by 45% to 50%.
The revised guidance that Scotts provided for non-GAAP adjusted earnings per share was $6.65 to $6.85. In June, the company forecasted non-GAAP adjusted earnings per share of $5.65 to $5.85. Scotts also said that it expects non-GAAP free cash flow of approx. $400 million, up from the $350 million that was previously reported.
Scotts Miracle-Gro is one of the few cannabis ancillary companies that offers a quarterly dividend and we are favorable on how the business has advanced so far this year. Going forward, the company has substantial growth prospects and is an opportunity that we will continue to closely follow.
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