EUR 850.00 For Business Accounts Only

Morningstar | Despite Our Tempered Housing Forecast, We Maintain Our $85 FVE for Scotts Miracle-Gro

After taking a fresh look at the assumptions underlying our housing starts projections and considering recent trends in key housing data, we've lowered our expectations for new construction over the next decade. We now expect about 15 million cumulative housing starts between 2018 and 2027, about a 10% reduction from our previous forecast of approximately 16.8 million.

However, with some housing pundits proclaiming the housing market has peaked, we believe our revised forecast is still bullish relative to the consensus view. Indeed, we still see several more years of solid residential construction ahead driven by the large and aging millennials population, continued job and wage growth, and an increased supply of entry-level homes. Our revised forecast calls for total starts to improve from 1.28 million in 2018 to 1.61 million in 2022 before moderating to 1.47 million by 2027. Previously, we projected total starts to grow from 1.30 million in 2018 to 1.93 million in 2021 and then moderate to 1.52 million by 2027. The main factors behind our moderated forecast are slower population growth driven by reduced immigration and a more difficult affordability environment than we had previously envisioned.

The change decreases our outlook for total owner-occupied housing units, and as a result, we've slightly reduced our U.S. consumer segment revenue growth forecast for Scotts Miracle-Gro. Having updated our model, our lower revenue is offset by the time value of money since our last update. As such, we maintain our $85 per share fair value estimate and narrow moat rating. At current prices, we view Scotts shares as slightly undervalued. We think the U.S. consumer segment will continue to benefit from housing growth, partially offset by the transition of some lawn-care products to an online marketplace.

Our fourth-quarter U.S. housing outlook, which we expect to publish in October, will provide investors with a more detailed review of our housing forecast revisions as well our top picks in housing-related sectors.