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The Ratings Game: Stifel and JPMorgan analysts trade blows on Scotts Miracle-Gro’s valuation

Analysts from JPMorgan and Stifel said Scotts Miracle-Gro Corp. stock is trading at a discount, but duked it out over whether the fertilizer and hydroponic equipment company deserves it.

Saying it has a cheap valuation for a reason, Stifel analyst W. Andrew Carter on Wednesday downgraded Scotts Miracle-Gro
SMG,
+7.48%

to hold from buy and reduced his target price to $116 a share from $130 a share.

JPMorgan’s Jeffrey J. Zekauskas upgraded shares of Scotts Miracle-Gro to overweight from neutral on the basis of the stock’s lower valuation after a 54% drop in the past year. He cut his price target to $130 a share from $150 a share.

Investors seemed to embrace the more bullish of the two analyst moves as shares of Scotts Miracle-Gro rallied 6.5% on Wednesday.

Zekauskas said Scotts Miracle-Gro is now trading at 2018 levels when the company was earning about $3.75 a share in annual profit compared to roughly $7 a share expected for 2022.

“We think these current trading multiples are inexpensive for a consumer products leader,” he said. “There is nothing particularly working in Scotts’ favor at this juncture, especially the cannabis-related businesses of Scotts.”

The analyst reduced his 2022 earnings target for Scotts Miracle-Gro to $6.90 a share from $7.70 a share. On average, analysts expect the company to earn $7.36 a share in fiscal 2022, according to FactSet data.

While Scotts Miracle-Gro’s second-quarter earnings of $5.03 a share beat Stifel’s estimate of $4.68 a share on a lower tax rate and higher U.S. consumer sales, the company suggested increased headwinds, Stifel’s Carter noted.

“We believe [Q2] earnings was an opportunity to reset expectations while driving the focus back to the platform’s long-term advantages,” Carter said. “Instead the company declined to update EPS guidance, adding to the uncertainty that has weighed on the shares alongside signs of a weaker environment.”

To be sure, Scotts said Tuesday it plans to provide more details on its outlook during the week of June 6.

Carter reduced his 2022 earnings target for Scotts Miracle-Gro to $7.24 a share from $7.31 a share, but said his long-term outlook and enthusiasm for the core business remains intact.

Despite this upbeat view about its future prospects, the company’s “earnings power will remain undervalued and underappreciated amid our tepid near-term EPS growth outlook, with catalysts driving sustained investor enthusiasm likely slow to develop,” Carter said.

Shares of Scotts Miracle Gro are down 34.2% in 2022 compared to a drop of 12.4% by the S&P 500 SPX .

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