Spring is in the air, conjuring up images of flowers blooming, birds chirping, Opening Day first pitches — and maybe even fresh, green lawns. Investors in the company behind many of those lush lawns, Scotts Miracle-Gro ( SMG -4.33% ), are looking forward to a fresh spring start as the stock of the leader in the garden and lawn-care industry is down nearly 50% from its 52-week high.
The decline is largely a result of the market punishing the stock for being a “COVID beneficiary.” Additionally, excitement for Hawthorne, Scotts’ cannabis supplies business, has dried up as marijuana stocks have struggled over the past year.
But the sell-off seems overdone, and perception that Scotts is simply benefiting from COVID-era trends seems shortsighted. In fact, the company looks well-positioned to deal with the current economic environment since it is a durable industry leader with strong brands and pricing power.
No one is going to stop taking care of their lawn
It’s been almost impossible to tune out news of inflation over the past several months as it hit a blistering 7.9% in the U.S. in February. This is troubling news for companies in many sectors of the economy that rely on discretionary purchases.
What I like about Scotts in this situation is that, for the most part, homeowners are going to keep taking care of their lawns regardless of what is going on in the broader economy. For better or worse, having a healthy green lawn has become something of a status symbol in the suburban United States, and most homeowners are going to continue to spend what’s required to have an attractive lawn.
Some people might cut out a night on the town or a fancy dinner from their monthly expenses. But it’s unlikely that they will forgo maintaining their property and risk having to live with a shabby lawn for the whole spring and summer (not to mention the comments from neighbors).
A nice, sprawling green lawn also gives a property curb appeal. And with primary residences serving as the largest financial asset many Americans have, they will continue do what they can to maintain or boost the value of their homes.
For these qualitative reasons, I view Scotts as a stock that can weather a potential downturn in the economy and successfully navigate through inflation.
Even better, we have evidence that the company can pass price increases on to its customers. Scotts has been able to raise its prices by 2% to 3% almost every year for the last 10 years. On its latest conference call, CEO Jim Hagedorn stated that the company will raise prices in the second half of the year, which would be the third increase over the past year.
This is the sign of a business that has pricing power and can keep up with or beat inflation over the long run. Scotts can exercise this power thanks to the aforementioned importance of lawn care to its customer base, as well as its brand equity. Scotts’ core portfolio of brands includes household names like Miracle-Gro, Tomcat, and Ortho.
Is Scotts Miracle-Gro a Buy?
Shares are down 50% as the market has lumped Scotts in with COVID beneficiaries and work-from-home stocks. The company did benefit from these trends (it gained about 20 million customers during this time frame). But it also expects about 85% of these customers to stay with the company, meaning that even though some of these customers will leave, the company still has many more than it did before. Looking ahead, the inelastic demand for Scotts’ products, its strong brands, and its pricing power should help the company to weather inflation.
In addition to all that, Scotts also offers investors the added bonus of a dividend payout that currently yields just over 2%. Lastly, Hagedorn has been at the helm of the company since 2001, and he and his family own about one quarter of the shares outstanding, so management has a long-term outlook that is aligned with shareholders. For these reasons, it looks like it is ready to return to greener pastures.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.