to spinoff its marijuana-related activities to shareholders.
With a market capitalization of 44.16 billion, forward P/E of 15.98 to 1, and book value of $6.49, Scotts Miracle-Gro is less than stellar, and at par with similar business models. Year to date, Scotts' shares have lost a third of their value – not the right formula to keep shareholders happy.
The only big wave was to move into marijuana a few years ago. SMG's Hawthorne Gardening subsidiary provides hydroponic solutions (growing plants in a nutrient-rich water solvent, as opposed to soil), along with lighting, nutrient, and soil products, to U.S. cannabis growers to improve yield. In fiscal 2018, Hawthorne was responsible for $344.9 million in sales, or 13% of total revenue. Their buy thesis has a twofold effect. First, there's the idea that even if the marijuana industry fell flat on its face and was hyped beyond belief, Scotts could always fall back on its core lawn and garden operations and remain healthfully profitable on a full-year basis. This makes it, arguably, one of the safest pot stocks. And second, with more and more U.S. states choosing to legalize pot in some capacity, the market for Hawthorne Gardening is growing. Despite 20% sales growth being recorded at Hawthorne as a result of its acquisition, organic sales would have declined by 27% without Sunlight Supply. The rapid drop in organic sales in the California cannabis market is too much supply and red tape associated with the dispensary-licensing process. With growers struggling to find the demand necessary to gobble up their supply, the outlook for hydroponic and growing solutions has dimmed a bit. Meanwhile, the marijuana industry has demonstrated that it has the makings of a viable business model, and placing more weight on its Hawthorne subsidiary concerning total annual sales should work out nicely for Scotts Miracle-Gro over the long run. When combined with cost synergies, it wouldn't be out of the question for Scotts to grow its earnings per share by approximately 10% on an annual basis over the next five years. That'd make it a modestly attractive stock for investors who want exposure to the marijuana industry -- without an overabundance of risk. And make no mistake – it is coming. Cannabis legalization is sweeping over North America – 10 states plus Washington, D.C., have all legalized recreational marijuana over the last few years, and full legalization came to Canada in October 2018.
And the reason for the stock spinoff --- comparative values of cannabis sticks to the stocks in the agriculture input sector are out of whack. Take the example of Tilray Inc. (TLRY), which has a capital capitalized of $9.88 billion, book value of $2.02 or which more than half is goodwill, and may never support a favorable P/E. Purely on value, TLRY doesn’t match up to SMG by a factor of 40 to one. Such disparity suggests either TLRY is overpriced or SMG is a bargain. The first part is true – TLRY and SMG is not a bargain. But SMG has a natural cannabis play that would unlock tremendous value --- a stock spinoff to shareholders of its cannabis division. Such a decision by Scotts Miracle-Gro board of directors would create at least $50 in new stock value.
In general, all cannabis stocks will have a higher market capitalization than traditional public businesses because of the real potential for cannabis growth. The only problem is capitalization. Most of the public cannabis plays are overprices and will never return any earnings to public shareholders in the form of cash dividends. But in the case of Scott, the hidden cannabis assets has value as a stand-alone public company, purely on what the cannabis industry valuation has become.