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Hey Guys,

I read or skim, and recommend if I find worthy, most of the posts, but just haven't had much to add, plus time has become scarce. With that, I would like to ask a question, and then I will post just a touch. I will post more in the coming weeks, as I am preparing for our annual conference on November 15th.

My question is: Does anyone subscribe to, and recommend the same to Guru Focus?


Now, some stupid tidbits:

SMG Scotts Miracle Gro Notes and Link to notes:

Here is a link to my updated SMG investment notes:https://t.co/jfWRINmRCh

My Scotts Miracle Gro investment notes. As all my posts, this post is nothing other than a sharing of research. Please read my disclaimer in the link below. I very well may never discuss this position again, even if we exit, or buy more. This post is not a solicitation, suggestion to buy or sell, nor an implication of such. Do your own DD!


November 7, 2018 ($72.11) 4Q18 earnings released

Reported annual revenues of $2.66B, we were expecting $2.68B. This is essentially in-line.

GAAP Income was $2.29 per share, we were expecting $3.29. Of course, this is a huge miss. SMG is trading up 1.79% at $72.46 as I write this, so obviously the “miss” is explainable. Non-GAAP adjusted earnings were $3.71 per share, compared with $3.94 a share from a year ago. This would explain the positive reaction here. I don’t like using non-GAAP items.

There was an Impairment and Restructuring charge of $132.3M, or $2.32 per share.

The company guided F2019 sales growth of 10% - 11%, resulting in non-GAAP operating earnings of $4.10 to $4.30 per share. Not knowing the GAAP adjustments, and assuming immaterial at this point, for lack of a better understanding, this guidance is in-line with our past expectations.

The company remains “bullish on the long-term prospects” of Hawthorne. Sales increased 20% to $344.9M. Excluding acquisitions sales declined 27% for the year.

The full-year diluted share count was 57.1M, we were expecting 56M for F2018, and 55M for F2019. This will be better understood with the issuance of the 10-K. I suspect shares will increase as cash becomes more important due to debt load. During the conference call, the company mentioned, “a share count of roughly 56.5 million shares.”

Hawthorne was 12.9% of sales, with $344.9M in Sales. The company projects Hawthorne will grow 9% in revenues, hence to $375.9M in F2019. The company guided 10% to 11% total company revenue growth. Hence expected revenues for the company in F2019 are expected to have a mid-point (10.5%) growth to $2.94M. If all that occurs, Hawthorne will have generated 12.8% of total revenues. I had previously projected that Hawthorne revenues would be ~19% of total sales. It looks like my projections were too optimistic.

Current ratio has weakened to 1.45X in F2018 from 1.62X in F2017.

Long-Term debt increased to $1,883.8 in F2018 from $1258.0 in F2017.

Shareholders’ Equity decreased to $359.6 in F2018 from $661.7 in F2017.

Long-term debt / Equity increased to 524% in F2018 from 190% in F2017. This is concerning.

PICTURE OMITTED - see link on top

Generic cash flow is something to watch and study. On one hand, cash flow is much greater than net income. On the other hand, debt levels and ratios are high. This is noted in the credit ratings. I don’t imagine agencies will increase ratings based on this report. I see it more possible that ratings could be reduced further from their highly speculative current ratings.

Conference Call Notes:

“Good morning, everyone. I'll get right to the point. I'm glad that fiscal 2018 is behind us.”

Claims to be successfully getting price increases to off-set commodity and distribution inflation.

Claims to be marketing agent of Roundup, and hence no exposure to litigation for glyphosate.

“I don't want to suggest we totally turned the corner because we still have work to do. There is a strong possibility that December quarter will also show a negative top line results. But based on the current trends, we currently believe it will be back in positive territory sometime during the March quarter, which is our Q2.”

SMG discusses the term “hydroponics.”

“Our use of the term mostly refers to small professional growers who happened to buy their growing equipment in retail channels. Now are those small professional growers facing different competition from larger growers? Yes. But it's just another kind of professional grower. What's unique about Hawthorne is that we're the only player in this space that is fully able to meet the needs of all growers. Our challenge is pretty straightforward at this point. It's all about execution. As we look into 2019 for Hawthorne, in addition to Sunlight, we expect organic sales of Hydro products to increase in the mid-single-digits. We expect a strong gross margin improvement overall segment profit of roughly $60 million.”

“I want to remind everyone listening that my family is the largest shareholder, so I'm no happier than any of you. But I'm committed and look forward to having a more positive story to share with all of you in 2019.”

Observations:

Full analysis must be with the issuance of the 10-K.

Bonds are acting well. There has been a slight degradation in the 2026’s.

PICTURE OMITTED -see link on top

I suspect that SMG is being cautious and conservative with their guidance. They discussed the need for conservatism when discussing the guidance and tribulations of Hawthorne division. I like very much how Hagedorn’s have a material insider ownership. At this point, our thesis remains affirmed. You can search the word “thesis” to see our past thoughts. Certainly, Hawthorne is proceeding slower than we imagined. I was expecting greater sales growth. Yet, with caution in the wind, and 9% projected revenue growth, I am willing to accept the challenges Hawthorne is going through.

We are concerned with the product shift to out of indoor grown quality dried flower to outdoor grown lesser quality as extraction is becoming more popular. It is our understanding that extracted lower quality flower can emulate more expensive indoor grown flower.


OT: Interesting thought I had:

O'Rourke lost to Cruz in 2018 Senate elections. A. Lincoln lost to Douglas in the 1858 Senate elections. Lincoln proceeded to beat Douglas, the Northern Democrat in the 1860 Presidential elections.

Until last night, I never heard of O'Rourke. My Lincoln studies are paying dividends.
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