Company Reports

The Bundestag, the lower house of Germany’s legislature, passed a cannabis bill last month that would allow possession of up to 25 grams and home-growing of up to three plants. The law will become effective April 1 as planned after the Bundesrat, the upper house, voted not to send it to mediation committee on March 22. The law expands on July 1 to allow nonprofit cannabis grow clubs of up to 500 members and 50 grams per member.

New single-family home sales increased 4% in 2023 to 666,000 units, as homebuilders capitalized on a dearth of existing for-sale inventory while also offering more sales incentives, cutting base home prices, and building smaller homes to improve affordability. By the fourth quarter of 2023, homebuilders began to pull back on sales incentives as the average 30-year fixed mortgage rate retreated from 7.62% in October 2023 to 6.64% in January 2024. However, mortgage rates have trended higher recently, and we now forecast the average 30-year fixed rate will be 6.50% in 2024, up from our previous forecast of 6.10%. Even so, that’s lower than the 2023 average of 6.81%, and we think homebuilders won’t hesitate to increase sales incentives if needed; they still enjoyed above-average gross profit margins last year with elevated incentives. As such, in 2024, we think new-home sales will increase 9% to 730,000 units and single-family housing starts will increase 4% to 985,000 units. However, we expect total housing starts will decline roughly 5% to 1,345,000 units due to a 23% decline in multifamily starts to 360,000 units, as there’s currently approximately 1,000,000 multifamily units under construction—the largest backlog in at least 50 years.

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products used for lawncare and gardening.

Scotts Miracle Gro’s fiscal 2024 first-quarter earnings saw sales continue to decline across its U.S. Consumer and Hawthorne segments, but we see improvements in both segments to restore profits. We’ve lowered our fair value estimate to $95 per share from $100 after incorporating a weaker near-term Hawthorne outlook as management will reduce third-party sales, leading to lower long-term sales and profits. Our narrow-moat rating is unchanged.

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products used for lawncare and gardening.

New-home sales have rebounded since the spring of this year as sales incentives and price reductions have attracted buyers who have fewer options in the supply-constrained existing-home market. That said, homebuilder sentiment data tells us that smaller builders remain cautious. Even so, we forecast single-family starts to increase by 3% in 2024, to 0.92 million units. However, we project this increase in single-family starts will be more than offset by a 24% decline in multifamily starts, to 0.36 million units. Multifamily construction has been robust for the past three years, but a record construction backlog and higher construction and financing costs have tamed developers' appetite for new multifamily projects.

Scotts Miracle Gro’s fiscal 2023 fourth quarter showed progress on the company's strategy to sell excess inventory and run its plants at lower capacity as a way to pay down debt. Having updated our model to incorporate the results, we maintain our $100 per share fair value estimate. Our narrow moat rating is also unchanged.

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products used for lawncare and gardening.

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

On Aug. 30, shares of the U.S. cannabis multistate operators rallied around 20%, with Canadian licensed producers up less, following news that the U.S. Department of Health and Human Services recommended to the Drug Enforcement Administration that it reclassify cannabis to a Schedule III drug from Schedule I. Cannabis, along with heroin and ecstasy, is currently listed as Schedule I, which means it is considered to have a high potential for abuse and no medical value. Schedule III drugs are considered less dangerous, with a lower potential for abuse and having some medical value. Lower scheduling would not necessarily be a panacea for the cannabis industry, but it could be enough to bring some important benefits to U.S. multistate operators, including paying normal tax rates, improved banking access, and potential listing on a major U.S. stock exchange.

Scotts Miracle-Gro's fiscal 2023 third quarter showed small progress in the company's turnaround efforts to restore profitability. Adjusted EBITDA was down 35% versus the prior-year quarter as the combination of cost inflation, lower volumes, and reduced plant capacity utilization weighed on profits. We've lowered our near-term outlook for the U.S. consumer business to account for the slowdown persisting longer than we had anticipated. Separately, we reduced our outlook for Hawthorne, assuming far slower revenue growth and profitability as the business' smaller operational footprint reduces its long-term growth trajectory.

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products used for lawncare and gardening.

Through the first four months of 2023 (typically viewed as the “spring selling season” for homebuilders) new home sales significantly outperformed existing home sales. Indeed, April year-to-date new home sales declined roughly 10% year over year compared to over a 26% decline for existing home sales. New home sales improved sequentially during the first four months of the year, and April sales increased 11% year over year, albeit on an easy prior-year comparison (April 2022 new sales were down 24% year over year).

We reduce our fair value estimate to $110 per share from $115 after updating our model to incorporate Scotts Miracle-Gro’s fiscal 2023 second-quarter results. Our narrow moat rating is unchanged.

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products used for lawncare and gardening.

U.S. home sales slowed significantly in 2022 as rising mortgage rates and elevated home prices made homeownership less affordable for more Americans. By mid-2022, the average 30-year fixed mortgage rate had increased roughly 300 basis points year over year to over 6%. According to estimates from the National Association of Home Builders, this rate increase priced out more than 16 million households. We also think higher rates and general economic uncertainty caused some qualified prospective buyers to move to the sidelines. All told, 2022 new- and existing-home sales declined 17% and 18% year over year, respectively.

Scotts Miracle Gro announced mixed fiscal 2023 first-quarter results, as strength in its core U.S. consumer business was offset by continued weakness in its Hawthorne segment. Having updated our model to incorporate first quarter results, we maintain our $115 per share fair value estimate and narrow-moat rating.

Scotts Miracle-Gro is the largest and most recognizable name in the U.S. consumer lawn and gardening market. The firm sells a wide array of products used for lawncare and gardening.

After analyzing recent United States housing market data and industry commentary, we've made downward revisions to our near-term outlook for new residential construction, home prices, and repair and remodel spending.

Scotts Miracle Gro reported fiscal fourth-quarter results that showed continued challenges in both the U.S. consumer and Hawthorne businesses which were consistent with 2022. Full-year sales declined 20% as many consumers who turned to gardening during the pandemic resumed pre-pandemic activities, while Hawthorne saw oversupply conditions. Management introduced new cost-saving initiatives and structural changes to account for a muted recovery outlook fiscal in 2023, calling for mid-single-digit adjusted EBITDA growth. Given Scotts' elevated debt levels, the company is focusing on cutting costs and reducing inventory as a way to focus on debt repayment. We have slightly reduced our near-term outlook to account for a slower Hawthorne recovery. As a result, we reduce our fair value estimate to $115 per share from $120. Our narrow moat rating is unchanged.