This stock's downgrade shows how the Iran war could hit home, even into next year

By Tomi Kilgore

Rising costs for fertilizer, diesel and plastics should hurt earnings growth for Scotts Miracle-Gro, says J.P. Morgan

Scotts Miracle-Gro's stock is downgraded at J.P. Morgan, citing the impact of rising raw materials costs on future profits.

Shares of Scotts Miracle-Gro slumped in early Thursday trading, after J.P. Morgan abandoned its long-held bullish stance on the lawn- and garden-care company, citing the effects of the Iran war on future profits.

If Scotts (SMG) has to pay more for raw materials - a result of the conflict choking off supply - it's a good bet the company will look to mute the impact by raising prices on products such as fertilizer and other lawn nutrients.

As Chief Financial Officer Mark Scheiwer said in January, according to a FactSet transcript of an analyst call, pricing is one of the three big "building blocks" the company sees as driving sales growth this year.

Analyst Jeffrey Zekauskas at J.P. Morgan lowered his rating on shares of Scotts to neutral, after being at overweight for at least the past three years. He also trimmed his stock-price target to $67 from $70.

"We think that raw material issues are likely to cause some earnings growth uncertainties," Zekauskas wrote in a note to clients. "We think that the sorting out of these uncertainties plus likely somewhat slower earnings growth are likely to place a brake on share price appreciation."

The stock dropped 8.1% to close at $62.19 on Thursday, its biggest one-day loss since slid 8.5% on July 30, 2025. The stock has now shed 11.3% in March - the Iran war started on Feb. 28 - which put it on track to snap a four-month win streak in which it soared 31%.

Zekauskas said the Iran war will have a lasting impact on the company's earnings. Based on current prices, the company is already set to pay more for raw materials out to fiscal 2027 than it has this year.

He said about 25% to 30% of Scotts' cost of sales is comprised of "variable costs," adding that most of that, if not all, is made up of commodity-sensitive materials.

For one, urea fertilizer prices have soared this month. Scotts buys about 150 kilotons of urea each year, per his estimate, and urea prices have surged to $660 per short ton from an average of $422 per short ton over the past year.

The company also buys about 30 kilotons (65 million pounds) of the polyethylene plastic a year, Zekauskas said, and prices have jumped to $1,280 per ton from an average of $843 per metric ton.

Diesel prices have also jumped, rising to about $5.37 a gallon from an average of $3.72 a gallon, Zekauskas noted.

Based on the fact that the company tends to concentrate its raw-material purchases for the following year in February and September, the company will have to pay about $45 million to $50 million more for raw materials in fiscal 2027 than it did for this year, he said.

While those numbers might not seem like they will have much impact on Scotts' results - the company reported cost of sales of $2.35 billion for fiscal 2025 - Zekauskas said that "they are a headwind." He cut his fiscal 2027 estimate for earnings per share to $4.35 from $4.65.

Scotts' stock had suffered a month-to-date drop of 14.9% as of March 12 as investors fretted over rising commodities costs. The stock has pared some of those losses, amid hopes that the war would end sooner rather than later, but was still headed for its worst monthly performance since February 2025, when it slid 17.5%.

-Tomi Kilgore

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03-26-26 1636ET