Bank Of America Upgrades Scotts Miracle-Gro, High On Cannabis Prospects

Scotts Miracle-Gro Co’s SMG cannabis division seems poised for growth, while expectations seem to be low for the company’s performance in the fiscal fourth quarter, according to Bank of America Merrill Lynch.

The Analyst

BofA’s Christopher Carey upgraded Scotts Miracle-Gro from Underperform to Neutral, raising the price target from $96 to $108.

The Thesis

The recovery in California’s cannabis market and policy developments could result in a broadening of the U.S. cannabis market in 2020, supporting growth of Scotts Miracle-Gro’s cannabis unit, Carey said in the upgrade note.

Although the U.S. consumer segment faces tough comps in fiscal 2020, the company is unlikely to guide to negative underlying organic sales for the cannabis division, the analyst added.

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Expectations for the company’s fourth quarter performance for fiscal 2019 were already low, with full-year guidance implying a 10% decline in U.S. consumer organic sales, Carey said.

Even if this were to be the case, this segment contributes only around 10% of the company’s revenue and would “not be material to total company results,” the analyst wrote.

Given the unpredictable equity market and the defensiveness of Scotts Miracle-Gro’s stock, the prior bearish rating did not seem appropriate, Carey explained. He added, however, that increased visibility into Hawthorne’s trajectory and growth in U.S. consumer in fiscal 2020 was needed to become “more constructive” on shares.

Price Action

Shares of Scotts Miracle-Gro were down 1.01% at $100.79 at the time of publishing on Tuesday.