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Morningstar | Initiating on Fast-Growing Cannabis Industry: We See Scotts Miracle-Gro as Slightly Overvalued

We are initiating coverage of cannabis, an industry we forecast to grow by 9 times through 2030 amid widening legalization and increased participation for the Canadian, international, and U.S. markets.

For Canada, despite recent recreational legalization, cannabis has penetrated just 12% of our estimated market, setting the stage for 20% CAGR through 2030.

For the international market, we forecast market potential of nearly $43 billion and 23% CAGR through 2030 as more and more countries recognize the benefits of medical cannabis. However, increasing competition from other countries could limit the opportunity for Canadian producers to $20 billion.

For the U.S., recreational and medicinal cannabis has penetrated just 8% and 21% of their estimated markets, leading to 25% CAGR and 15% CAGR through 2030, respectively. We expect six more states to legalize recreational cannabis and three states to expand commercial distribution. We expect the federal government will recognize states’ right to decide legality.

Scotts Miracle-Gro's Hawthorne segment is the top supplier of hydroponic cultivation equipment that provides indirect exposure to the U.S. and Canadian cannabis markets. Hawthorne has an estimated market share of 40%-50% depending on the product. Over the next decade, we forecast Hawthorne’s 10-year revenue to grow at a high-single-digit pace annually, as Hawthorne maintains its status as the market leader for cannabis growing inputs and equipment. With our outlook intact, we maintain our $88 fair value estimate and narrow moat rating.

At current prices, we view shares as slightly overvalued. While Hawthorne will see volume growth, we don’t expect the business to command the same pricing power as Scotts’ consumer gardening products because the Hawthorne products are commodities. However, as Hawthorne continues to gain market share, it should generate an increasing proportion of total company profits, growing from roughly 10% in 2017 to 30% by 2028.

For more details on the cannabis industry and our market forecasts, please see our observer, “Green Rush: Cannabis Market Will Grow by 9 Times by 2030 Amid Widening Legalization.”