This Stock Is Best Watched From the Sidelines

Neha Chamaria, The Motley Fool
Updated

It's sad when a company that helps beautify our surroundings fails to present rosy numbers. Lawn-care specialist Scotts Miracle-Gro's (NYS: SMG) fourth-quarter numbers were a bummer, as heavy rain and hurricanes took a toll on revenues.

Scotts' growth plans look good. But are they enough to offer hope that the bottom line will return to the black?

Great Scotts!
Mother Nature's fury on one hand and painful raw-material costs on the other hit Scotts hard. Internal restructuring costs pressured margins further.

Since Scotts focuses on landscaping products, weather disruptions give its business a hard time. And that's precisely what Hurricane Irene and the abundance of heavy storms that characterized this year did to Scotts' fourth-quarter top line. Its sales slipped 1% from the year-ago quarter to $417.2 million.

Moreover, when most fertilizer companies are enjoying high product prices, Scotts was hit by high input costs. This isn't surprising, considering the way prices of inputs like urea have shot up lately. Terra Nitrogen's (NYS: TNH) third-quarter revenues surged nearly 50% as prices of ammonia and urea exploded. These chemicals also drove CVR Partners' (NYS: UAN) third-quarter revenues up an astounding 66.4% to $77.2 million.

Apart from inputs, restructuring and impairments added an additional $62.3 million to Scotts' costs. Together with lower sales, Scotts' loss from continuing operations widened to $71.7 million from $33.1 million a year ago.

Busy bee
Scotts has lots of plans lined up for next year, from product launches to ramped-up advertising. It's especially upbeat about next year's nationwide rollout of its new Snap lawn spreader, aimed at making lawn care easier. Scotts will also be expanding the reach of its Expand and Gro planting mix in Texas, following its success in Europe.

But one setback involves the uncertainty over the launch of its new MAT28 herbicide. Problems arose when, after chemical giant DuPont (NYS: DD) launched a version of the product, it was found out to be damaging trees. Scotts will now have to spend more on research before getting the product into the market.

In a bid to attract more customers, Scotts has planned greater spending on media next year, strengthening its focus in areas such as social media. Scotts is also investing in improving its distribution system in the U.S. Northeast.

Scotts relies mainly on retailers for sales, and it's currently in talks with its retailer partners regarding its merchandising and pricing strategy. Its partners include big retailers such as Home Depot (NYS: HD) , Lowe's, and WalMart. The three accounted for 60% of Scotts' total sales last year.

Firm handshakes
Scotts' focus on innovation is impressive. Last month, it joined hands with pest-management products provider Marrone Bio Innovations to innovate and develop new products for the lawn and garden market.

Scotts also added a feather to its cap when it was chosen by the U.S. Conference of Mayors for a multiyear partnership focusing on national garden and greenscape development.

But most interesting development has been Scotts' teaming up with none other than automaker giant Ford (NYS: F) , so the two can research how coconut fiber can be used as reinforcement for molded plastic parts in cars.

The Foolish bottom line
Scotts' numbers aren't as impressive as its growth plans. It expects losses to increase from the first quarter because of lower sales volumes and high costs. Clearly, it would make sense to wait and watch till things improve a bit on the earnings front.

To keep track of those moves, you'll want to add Scotts to your stock Watchlist -- the free, personalized stock-tracking service brought to you by The Motley Fool. It's the easiest way to stay updated on your favorite companies.

At the time thisarticle was published Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article.The Motley Fool owns shares of Ford. The Motley Fool owns shares of Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart, Lowe's, Home Depot, Scotts Miracle-Gro, and Ford, creating a diagonal call position in Wal-Mart, and writing covered calls in Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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