Share of The Scotts Miracle Gro Co. (SMG, Financial), an industry leader in the lawn and garden industry, are up 4.91% since the start of June. The company’s rally is in part due to new marijuana laws being put in place and the acquisition of Sunlight Supply Inc.
Sunlight's acquisition is expected to boost sales for The Hawthorne Gardening Company, a subsidiary of Scotts Miracle Gro Co. which specializes in hydroponic products. The transaction is expected to be dilutive in the fiscal 2018 year at 30 cents to 40 cents per share on a non-GAAP adjusted basis. Dilution is expected due to deal costs and interest expenses.
Hawthrone is expected to save $35 million in annual synergies through what is being called "Project Catalyst." The company's stock has risen 5% since June 4 when the deal was finalized.
The synergies between the companies will position it as one of the leading beneficiaries in the legal cannabis market. Legal annual sales are expected to reach $21.8 billion in the U.S. alone by 2020.
Scotts Miracle Gro is one of the top cannabis stocks, with investors having few options outside of penny stocks. Scotts has a long history of success. The company earned $2.6 billion in total revenue in 2017.
It has been aggressively positioning itself to profit from the marijuana industry since 2015 through multiple acquisitions. The company's Sunlight acquisition is expected to double its sales in the marijuana industry.
Hydroponic products, used for indoor growing, are the company's leading products in the industry. Canada's recent Canada's recent C-45 Bill legalized recreational cannabis use in the country. The legalization is expected to propel the industry to $4.34 billion by next year.
Scotts Miracle Gro will benefit from an industry that's expected to grow by a pace of 25% to 35% per year through 2021.
Scotts provides growers with fertilizer, lighting systems and hydroponic systems. The company's Hawthrone division attributed to 35% of Scotts' total revenue in the 2017 year. Sales at the division fell to 29% for the segment in the company's fiscal second quarter 2018 results. Sales fell 7% in the most recent quarter, down from $1.08 billion in second quarter 2017, to $1.01 billion in Q1 2018.
The company expects Hawthrone to experience sales challenges in California through the remainder of the year. The company is reporting flat sales, at best, year over year.
A rise in legalization, with the primary focus on Canada, has the potential to boost Hawthorne's sales. The segment is still positioned to be one of the highest beneficiaries of marijuana legalization.
