Growth from Miracle-Gro

04/21/2006 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

Jon Markman is an expert on "swing trading" - a strategy focused on positions between short-term trading and long-term investing. With April designated as National Lawn Care Month, he looks at Scotts Miracle-Gro - to help your portfolio - and your plants - grow.

"The Scotts Miracle-Gro Co. (SMG NYSE) , a member of my Core Select list, is a provider of branded lawn and garden care products with a name that should be familiar to all. Scotts generates its earnings by helping homeowners seed, fertilize, weed and insect-proof their lawns. Essentially, Scotts acts as enabler of the suburban urge to conquer the environment. You can plant the grass and plants you want, kill the ones you don't want; attract critters you like; kill ones you don't like; and lounge comfortably in your lawn chair to observe it all.

"The stock has lost about 10% from its recent high and is now down 4.5% for the year. But for the Number 1 company in the US lawn and garden industry, with a 54% share of a market growing in the mid single digits, this price behavior is normal. It is related to the extreme seasonality of the industry, and its exposure to the weather. As analysts at the Buckingham Research Group point out, the stock tends to dip every year during the beginning of the growing season based on weather concerns.

"So although Scotts ships nearly 80% of its annual volume during the March and June quarters, everyone pooh-poohs the stock during this time because it's always too hot or too rainy somewhere. Although the industry is exposed to weather, it normally just affects revenue timing, not so much total sales. And this year the stock has the added drag of being grouped with home-building companies, which are out of favor.

"One reason I like Scotts is its resiliency to economic downturns. People don't tend to change their lawn or garden maintenance habits based on what the economy is doing. This is due to the low product prices and the value consumers perceive they are getting. You are not likely to let your lawn fall into disrepair to save $40 on fertilizer and weed killer.

"Looking ahead, there are many catalysts that should help drive the stock higher again. For one, the company has taken savings from its Project Excellence cost cutting program, and used the cash for an additional 20% in advertising spending. As an example of where the money is going: the company is sponsoring company employees to hang out in the aisles of hardware stores to consult with customers and help drive sales.

"The company also has a lot of new products, including Liquid Miracle-Gro, which was developed internally, and birdseed and lawn furniture, which came from acquisitions. According to company management, bird chow and Smith & Hawken chairs mesh nicely with their established supply chain and have helped to expand acquisitions to Scotts' benefit.

"With the recently initiated $500 million share repurchasing program, and what appears to be a nice spring season ahead of us, it's only a matter of time before Scotts starts growing again. For the year, I think the company can earn $2.68, and then put up around $3.03 in 2007. If you're patient, you can start or resume buying on this dip to the 200-day moving average of about $44.80. But over the past 13 years, the stock has tended to bottom in June or July - so would also look for another entry point in mid-summer."

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