With this week's scorching temperatures, Americans are getting the urge to play in the dirt again.
Gardening may not be sexy, but it is big business. Recent surveys indicate that nearly 80% of Americans garden, with the average consumer spending $530 on garden items annually. The National Gardening Association estimates that the gardening market reaps about $38 billion each year.
Most consumers buy their gardening supplies from three sources: local nurseries; do-it-yourself stores like
; and discounters like
. So, Bottom of the Barrel went looking for companies that serve this lucrative market.
And, like a flower blooming in a field of weeds,
popped into the Barrel screen.
Planting the Seeds
Hines is among the largest suppliers of container-grown plants to big retailers through nursery facilities in California, Oregon, Texas, South Carolina and Pennsylvania. In fact, Hines is the largest producer of ornamental plants in North America.
That puts Hines in the sweet spot of the industry. Nearly 35% more households used seedlings -- as opposed to seeds -- to start gardens in 2001 than in 2000, according to NGA data. That trend, along with 6% to 8% annual growth in the gardening industry and Hines' dominant market position, has helped the company post solid sales growth at a compound annual rate of about 20%.
Acquisition Life Cycle
Hines' acquisition life cycle has come full circle. In June 1993, the company acquired Sun Gro, North America's largest producer of sphagnum peat moss and professional peat- and bark-based mixes. That started a string of a dozen acquisitions to gain market share.
These acquisitions significantly affected Hines' growth as well as its balance sheet. The company recently sold its Sun Gro division to a Canadian concern for $120 million. Those proceeds have been used to pay down debt, which at a year-end $390 million was threatening to choke the company.
Hines has since reduced debt to $303 million, including seasonal borrowing that peaked in the second quarter. In total, the company has $79.2 million in 11.75% senior subordinated notes, $102.5 million in term loans and $121 million on its revolver -- including $30 million in working capital scheduled for repayment in May.
That's a lot of debt for a small company like Hines, which sports a mere $96.7 million market capitalization. Yet, recent asset sales, subsequent debt reduction and an adjusted repayment schedule -- Hines will pay off an additional $17.5 million in 2003 and $15.5 million in 2004 -- should provide some flexibility to the balance sheet. Still, the debt-to-equity ratio of more than 3.7 is high. However, continued balance sheet improvement could prompt a credit upgrade.
Spring Forward, Fall Back
Hines' earnings follow the seasons. "In 2000, approximately 72% of Hines Nurseries' net sales and approximately 101% of Hines Nurseries' operating income occurred in the first half of the year," according to the company's recent
Securities and Exchange Commission
filing. "Approximately 54% of Hines Nurseries' net sales and approximately 88% of Hines Nurseries' operating income occurred in the second quarter of 2000."
Consensus estimates call for Hines to earn 56 cents a share this year, up from the year-ago 26 cents, the result of a slower economy and a fire at its Alberta, Canada, mulch plant in 2000. Sales are expected to grow about 3% to $337.2 million.
Those estimates seem conservative to me. The outlook is even better if you assume the consumer's preference for seedlings over seeds continues, the economy perks up, and Hines gains market share by providing more timely products to its big customers.
That may be possible as a result of new inventory systems, which also should improve margins by reducing spoilage. William Gibson, an analyst at Banc of America Securities, estimates margins should be 51.8% this year, although that may be low. "
Potential upside to our margin assumptions is possible as the company should be able to improve on its scrap rates with a wider rollout of its Enterprise Resource Planning System," he says. He rates the stock a buy with a price target of $6. His firm has not provided banking services to the company.
Blossoms Among Weeds
This isn't a stock for the faint of heart. It's a micro-cap that trades a measly 7,409 shares on average per day. Despite its improved debt picture, Hines remains highly leveraged with costly debt.
But, if you've ever stood in line as I did at Lowe's the other day and wondered who grows all those plants everyone is buying, Hines' potential may intrigue you. That's especially true when you learn that customers at Home Depot and Wal-Mart are buying Hines' plants as well.
I like this stock, which trades at just 7.6 times 2002 estimates, and the company boasts an improving balance sheet and sales outlook. Its size and potential volatility prevent it from earning a higher rating, but it's exactly the kind of stock that fits -- and may sprout from -- the Bottom of the Barrel. I give it two barrels. (For an explanation of our barrel rating system,
see our description.)
Speaking of gardening, join Eric Gillin and me for this week's edition of
Happy Hour, when we talk to the director of research for the National Gardening Association about the industry and how you can profit from it.
I'll take an in-depth look at several Barrel companies next week as I report on meetings at this week's SunTrust Robinson Humphrey investment conference. However, here are a couple of comments relating to earnings.
reported earnings slightly ahead of expectations, with strong loan growth and continued solid asset quality.
disappointed, reporting only 51 cents a share for the quarter vs. consensus estimates of 61 cents. Lower interest rates and continued portfolio repositioning hurt the bank in the first quarter. The stock has provided nice gains since its
profile in December, and it remains in the portfolio, although under careful watch.
Finally, recent softness in
may be the result of comments by CEO David Gould at the Robinson Humphrey conference. He indicated that the company may exceed first-quarter consensus estimates, but second-quarter revenue could be a bit soft. However, he reiterated the company's comfort with full-year earnings estimates of 17 cents a share.
Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies, and your full name and hometown. If I profile your suggestion, I'll send you a
gift to commemorate your pick.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to
Eric Gillin assisted with the reporting of this column.