Morningstar | Maintaining Scotts Miracle-Gro $86 FVE as Shares Fall 7% on Glyphosate Ruling; Shares Undervalued
On March 20, Scotts Miracle-Gro shares were down nearly 7% at the time of writing due to a San Francisco jury ruling that found that Bayer's glyphosate-based Roundup product causes cancer. Scotts markets the consumer version of Roundup. We reiterate that Scotts is indemnified from Bayer against any Roundup-related lawsuits and as such, we think all potential legal liabilities would fall to Bayer. Further, we note that glyphosate-based Roundup sales typically account for less than 5% of Scotts' total sales. As a result, we maintain our base-case forecast.Separately, Scotts announced that the company sold its 30% stake in the TruGreen lawn services joint venture to private equity firm Clayton Dublier & Rice, which owns the remaining 70% stake with co-investors and management. Scotts expects to receive $120 million to $140 million in after-tax proceeds from the sale, which is in line with management's estimates. Having updated our model to account for the joint venture stake sale, we maintain our $86 per share fair value estimate for narrow-moat Scotts. At current prices, we view shares as slightly undervalued.
Under the terms of the agreement with Bayer, Scotts can develop consumer products using the Roundup brand name independent of Bayer, such as Roundup for Lawns. However, none of Scotts' internally developed products contain glyphosate. As a result, we do not expect any of Scotts' internally developed products to be subject to glyphosate-related lawsuits. Further, Scotts may choose to market more of its internally developed products under a different brand name, such as GroundClear, which is a new product launched this year that complements Roundup, but does not carry the Roundup brand name.
Scotts Miracle-Gro is a manufacturer and marketer of consumer lawn and garden products in North America. The company's segments are: United States Consumer, which consists of the company's consumer lawn and garden business located in United States; Hawthorne, which consists of the company's indoor, urban and hydroponic gardening business; and Other, which consists of the company's consumer lawn and garden business in geographies other than the United States and the company's product sales to nurseries, greenhouses and other customers. The company manufactures, markets and sells lawn and garden products in the following categories: lawn care, gardening and landscape, hydroponics, and controls.
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