Scotts Miracle-Gro Downgraded by Wells Fargo Based on 3 Key Elements

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Analysts at Wells Fargo, led by Chris Carey, downgraded The Scotts Miracle-Gro Company (NYSE:SMG) to Equal Weight from Overweight Wednesday, reducing the firm’s price target on the stock to $85 per share from $115.

In a note to clients with the heading ‘The Green Wave Isn’t Coming…Meaning No Relief for This Story Until FY23,” Carey said there are three key elements to the story, with the first two not improving until next year.

The elements are lawn/garden recovery, Hawthorne recovery, and levered balance sheet.

“#1 can’t be proven until the FY23 season, with the FY22 season already starting to wind down as retailers clear inventory for the season ahead; and, the narrative around #2 (Hawthorne) became worse for us today, with our inaugural Cannabis Cultivator Survey published in conjunction with this note (an exhaustive effort reaching out to the US cannabis cultivator complex) showing an industry under significant duress, with little visibility on a turn,” wrote the analysts. “This means the focus on SMG likely becomes more pronounced on #3, a levered balance sheet, which we expect to be elevated for the next 4 quarters, ending Sep FY-end at 5.5x but breaching 6.0x in Mar 2023 during the seasonal debt build, before ebbing thereafter.”

Carey added that the four-quarter stretch seems “critical for the economy (slowing) and stock market (volatile), where any names with leverage likely see little support in our view.”