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Here's Why Scotts Miracle-Gro Fell 42.6% in 2018

What happened

Shares of Scotts Miracle-Gro (NYSE: SMG) fell more than 42% last year, according to data from S&P Global Market Intelligence. The move lower took place in an otherwise breakout year for businesses associated with the burgeoning marijuana industry, but the consumer lawn and garden leader had two staunch headwinds to contend with.

The first blow to the business came from a lingering winter, which delayed the start of gardening season and proved too much for the consumer lawn and garden segment to overcome. The second blow hit the company's formerly fast-growing Hawthorne segment, which sells hydroponics, lighting, and other equipment to marijuana producers large and small. It saw year-over-year revenue growth slow and posted a surprising loss in fiscal 2018. The step backward was chalked up to growing pains for a segment that operates more like a standalone start-up.

Management was happy to put the year behind it and struck a tone of optimism when announcing full-year fiscal 2019 guidance. As of Jan. 11, the stock had settled to a 10.5% gain since the beginning of 2019.

Image source: Getty Images.

So what

Scotts Miracle-Gro achieved $2.11 billion in revenue and $497 million in operating income from its consumer segment in fiscal 2018, representing a year-over-year drop of 2% and 5%, respectively. The Hawthorne segment achieved revenue of $345 million and an operating loss of $6 million for the year, compared with sales of $287 million and a profit of $35 million in the year-ago period. Revenue growth for the smaller segment was only achieved with a helping hand from acquisitions. Exclude those additions, and revenue slipped 27% year-over-year.

On one hand, investors can rationalize that Wall Street would punish Scotts Miracle-Gro stock for a rough year of operations. On the other hand, given the irrationality of valuations awarded to businesses in the marijuana space, investors might think Mr. Market would be a little more forgiving.

While the Hawthorne segment accounted for only 13% of the company's total revenue in fiscal 2018, the segment's $345 million in sales dwarfed the revenue of marijuana producers such as Canopy Growth, Cronos, and Tilray. They're each worth billions.

Now what

Perhaps shareholders would rather not see Scotts Miracle-Gro get swept up into the marijuana craze insofar as valuations are concerned. But there's still a solid argument to be made that the stock is pretty cheap right now. Shares trade at just 14.5 times future earnings, near a record low, and sport a 3.5% dividend yield, an all-time high. For a business that's comfortably profitable and can chalk up much of its woes to short-term and hopefully one-time headwinds, shares may be too cheap to pass up.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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