Wait for the Weather With Scotts

 | Feb 07, 2012 | 2:30 PM EST  | Comments
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With temperatures hitting 50 degree mark here in New England, it got me thinking about spring. And when you think about spring, there's only one name that stands out: Scotts-Miracle Grow (SMG).

This morning, Scotts reported an adjusted loss from continuing operations of $1.18 on 8.3% lower revenues. For the three months ended Dec. 31, 2011, the lawn and garden company reported net sales of $211.2 million. Given the seasonal nature of the lawn and garden business, Scotts traditionally reports a loss in the December quarter.

For fiscal year 2012, Scotts said it expects sales to rise at least 6%. The company is encouraged since consumer retail sales in Texas and Florida are up more than 20% since Jan. 1. In fiscal 2011, sales declined 2% because poor weather throughout much of the country hurt demand. For FY12, the consensus estimate is for 7% sales growth.

With 70% of its commodity costs now locked in for the year, including 90% of urea, management is confident it can manage $80 million in commodity inflation for the year. Because of higher commodity costs and an additional $40 million increase on television ad spending, management expects gross margin to decline. Prior to the company's conference call, the consensus was estimating FY12 gross margins of 35.5%, which already anticipated higher promotional spending.

Management will provide more detail on the quarter and its plans for the year when it holds its annual analyst meeting on Feb. 14.

Last year, the company underwent a restructuring, selling off its Global Professional unit for about $270 million to Israeli-based fertilizer and chemical company ICL. The proceeds were earmarked for capital investment and to grow its market share. Scotts is part way through a $500 million stock repurchase program and it recently doubled its cash dividend. 

Scotts has always been a difficult stock (at least for me anyway). There's so much riding on the weather. Last spring was wetter than normal and this winter has been unusually mild in many parts of the country. While everybody likes to pretend the long-range weather forecast is a solid guide, who knows what the weather will bring for the rest of the year? I would rather not buy the stock of a company with margins under pressure and so much demand uncertainty. Historically, the stock trades between 12x and 19x estimates. Right now, it's trading at 18x estimates of $2.80. To me, Scotts seems priced for perfection (or at least perfect weather). I'll sit on the sidelines and hope for a better weather.

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