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Better Buy: Scotts Miracle-Gro vs. Home Depot

Scotts Miracle-Gro (NYSE: SMG) and Home Depot (NYSE: HD) have a lot in common. Both companies have similar ties to home maintenance and care (albeit in different ways), both are long-established names, and both are benefiting from some interrelated business trends.

Overall, the choice of which company to invest in is very much dependent on the types of industry you prefer. Let's take a closer look at each and see if a choice becomes more clear after further reading.

Strength of performance

Scotts Miracle-Grow has had underwhelming annual sales growth over the last five years, with an 8.1% decline in 2016, and a stagnant 0.9% increase in 2018. The narrative changed in 2019 when the company finished the year with $3.2 billion in sales; an 18.5% gain year over year. Much of the growth narrative has stemmed from the Hawthorne segment, which deals with hydroponics. Earnings for fiscal Q1 2020 continued the improved growth story, with a 23% increase in year-over-year net sales to $365.8 million for what is traditionally its slowest quarter.

Image source: Getty Images.

Home Depot has had better annual consistency in revenue growth, putting up 6%-7% growth annually until 2019. $110.23 billion marked a slow down to 1.87% annualized growth. Part of that slower growth rate was due to an extra week in fiscal 2018, adding an additional $1.7 billion to the fiscal year.

Through that time, earnings have been very strong; averaging just under 13% annually from 2016 through 2019. Again, 2019 marked a downturn in the growth trend, with earnings growing a mere 1.09% to $11.24 billion. Again the earnings were partly impacted by an extra week in fiscal 2018.

Outlook and valuation

Scotts Miracle-Gro provided fiscal 2020 guidance for sales growth of 4% to 6%, with adjusted earnings of $4.95 to $5.15 per share. Conservatively, those adjusted earnings would mark a 10.7% improvement from fiscal 2019.

How you wish to value Scotts Miracle-Gro shares is based largely on the inclusion or exclusion of restructuring, impairments, and one-time items. Full generally accepted accounting principles (GAAP) earnings from continuing operations were $7.77 per diluted share. From a GAAP perspective, the stock is trading at 15 times 2019 earnings. On an adjusted basis, earnings were $4.75 per share. That's a 20.4% increase year over year and gives the stock a trailing price-to-earnings ratio of 24.5. The low end of adjusted 2020 guidance gives the company a forward P/E ratio of 23.5.

Home Depot reported fiscal 2019 earnings of $10.25 per share, on net income of $11.2 billion. That would give the company a trailing P/E ratio of 22.1. Home Depot provided fiscal 2020 guidance that anticipates sales growth of 3.5% to 4% for the year, with comparable sales expected to increase at the same pace. Earnings are expected to increase by 2% to $10.45 per diluted share. That would give Home Depot a forward P/E of around 21.7.

Overall, the valuations of the two companies are pretty similar on an earnings basis. Neither stock is not particularly cheap on a price-to-earnings basis.

How do they stack up?

In terms of investing, I favor Scotts Miracle-Gro due to the nature of lawn care. Grass, weed control, plants, and flowers need more constant attention than one might put into home remodeling projects or appliances.

Both companies have some snags. Neither is particularly cheap. Home Depot offers a 2.66% dividend yield, while Scott Miracle-Grow carries a 2.01% yield. And neither has the most beautiful balance sheet. Home Depot's total stockholders' equity is actually negative $3.12 billion thanks to the company's $28.6 billion in long term debt. While Scotts Miracle-Gro does have $629.3 million in total equity on the balance sheet, the company still carries a debt-to-equity ratio of 4.5. It has wracked up quite a few liabilities building out its hydroponics business related to cannabis cultivation.

There's a bit of irony here in comparing them as investments, as the two companies actually benefit each other. Scotts Miracle-Gro supplies products to home improvement stores like Home Depot, and as a major retailer, Home Depot relies on suppliers like Scotts Miracle-Gro to fill its product chain. Home Depot operates in a broad retail environment, while Scotts Miracle-Gro is focused on a more niche segment. Which investment you choose comes down to whether you prefer exposure to broad-based retailers or suppliers.

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David Butler has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and Scotts Miracle-Gro. The Motley Fool recommends Lowe's and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.


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