Scotts Miracle-Gro Downgraded

Scotts Miracle-Gro stock has been downgraded by Raymond James analyst Sam Darkatsh on valuation after the company reported a less-than-perfect fourth-quarter beat.

Author:: Andrea Tse
Publish date:: Nov 5, 2010 12:35 PM EDT

(Scotts Miracle-Gro earnings story updated with stock price change and an analyst downgrade)
NEW YORK (TheStreet) -- Scotts Miracle-Gro (SMG) - Get Report stock has been downgraded by Raymond James analyst Sam Darkatsh on valuation after the company reported a less-than-perfect fourth-quarter beat.

"We downgrade Scotts Miracle-Gro to market perform from outperform. Fiscal fourth quarter 2010 came in ahead of our expectations (entirely on cost control) and retailers seem likely to continue to support the category next season," Darkatsh explained in a note released on Friday. "However, the stock's forward multiple at 14x has now moved 10% to 15% above that of the S&P 500's multiple of about 12.5x. Consistently over the last 10 years, the best time to buy the stock has been when the stock has traded below the market multiple and the time to avoid it has been at or above the market multiple."

Scotts Miracle-Gro stock was up 0.6% to $52.17 in midday trading. On Thursday, the stock was falling after a less-than-perfect quarterly earnings beat.

For the quarter, Scotts Miracle-Gro reported adjusted loss from continuing operations of $19.1 million, or 29 cents a share, vs. the consensus loss estimate of 34 cents a share. During the same time last year, the company reported loss of $23.2 million, or 36 cents a share.

The adjusted earnings excludes an $18.5 million non-cash asset impairment charge related to certain brands and sub-brands that have been discontinued or the company is focusing less on now.

Fourth-quarter sales fell 9% to $475.7 million from $522.5 million the year before, falling below the consensus estimate of $506.7 million.

"It is important to note that the quarter had five fewer days than in 2009 due to a shift in the fiscal calendar," the company said in a press release. "Those days accounted for $37.7 million in sales in 2009 ... the sales decline in the quarter is in line with expectations due to the calendar shift and early season increases in retail inventory levels."

During the quarter, Scotts LawnService sales declined by 2%; Global Professional sales fell 11% as retail restocking fell in the quarter.

Although the company finished the year with positive POS (point of sale) in more than 40 states, a seasonal slowdown was also kicking in. Rising commodity costs for the company were also noted.

"Despite a weaker top line, the operating loss (excluding charges) narrowed to $23 million, down from a $26 million loss in the prior year (margins were negative 5% for both years), thanks to higher pricing and tight expense controls," Morningstar analyst Zoe Tan said in an analyst report. "While we believe that the firm will continue to enjoy these benefits over the next year, they will be partially offset by higher commodity costs and increased marketing expenses. Therefore, we project that the operating margin in fiscal 2011 will be just slightly above the 13.1% posted in 2010."

The latest data from

Reuters

, last updated Nov. 5, shows that the consensus recommendation from 13 analysts for Scotts Miracle-Gro is outperform. BMO analyst Connie Maneaty, who has an outperform rating for the stock, said Scotts Miracle-Gro's fiscal year 2010 earnings of $3.41 was ahead of her $3.34 estimate. "Prior to today's release, our near high-on-the-Street fiscal year 2011 estimate of $3.83 suggested growth of almost 15%. With today's upside, our estimates are under review," she said in a note.

>>Search for Highest Dividends by Rate or Yield