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Morningstar | Raising Our Scotts Miracle Gro FVE to $88 on Increased 2019 Guidance; Shares Fairly Valued

On June 5, Scotts Miracle-Gro raised its fiscal 2019 guidance, with management now guiding to adjusted EPS of a range of $4.20-$4.40, up from the previous range of $4.10-$4.30. The increased guidance comes largely from the expectation for greater sales growth in the U.S. Consumer segment, partially offset by a mix shift to lower-margin items as management called out greater-than-expected mulch sales.  Having updated our model to incorporate the increased outlook, we raise our Scotts Miracle-Gro fair value estimate to $88 per share from $87. Our narrow-moat rating remains intact. With the stock trading just above our fair value estimate, we view Scotts shares as fairly valued.

In the Hawthorne segment, which primarily sells hydroponic equipment to cannabis growers, Scotts is pursuing a volume over price strategy, offering discounts on its equipment in order to gain market share. Over the long term, once Hawthorne has a clear market leading position, management will then focus on growing profits in the business. As more states legalize cannabis for either recreational or medical use in the future, we think Hawthorne's market share strategy will allow the company to quickly grow sales in the new markets.

In the U.S. Consumer segment, we continue to expect that the proportion of online sales will grow, especially for easier to transport products such as pest control and plant food. As online sales grow over time, we expect a slight deterioration in the pricing power of Scotts' brands, which underpins our negative moat trend rating.