JP Morgan Downgrades Scotts Miracle-Gro To Neutral

JP Morgan’s Jeffrey J. Zekauskas downgraded the rating for Scotts Miracle-Gro Co (NYSE: SMG) from Overweight to Neutral, with a price target of $70, citing uncertainties created by the company’s recent several transactions.

Scotts Miracle-Gro’s shares have appreciated 14.8 percent year-to-date, versus a 0.4 percent gain in the S&P500. The company is well positioned from a raw materials perspective in the FY16 lawn and garden season. Analyst Jeffrey Zekauskas expects the warm North American winter to have a positive impact on the performance of the lawn & garden category in FY16.

Scotts Miracle-Gro’s durable and strong business franchise is well levered to volume growth and the company also has a favorable raw material dynamic at work, the analyst added.

Improved weather conditions and lower raw material costs are expected to have a positive impact on FY16 earnings. The company is expected to post an EPS of $4.00 in FY16, up 12 percent y/y.

Uncertainty Related to Corporate Transactions

Scotts Miracle-Gro is currently executing a number of corporate transactions, including a joint venture of the Scotts LawnService business with TruGreen and a minority investment in Bonnie Plants.

The company is also planning to divest or enter into a joint venture for its European lawn and garden assets, besides completing additional acquisitions in the hydroponics or indoor gardening category.

The company’s leverage after these transactions are expected to be below 3.5x annual EBITDA, the analyst stated.