During the US gold rush of 1850, there were two main ways to cash in. The first was mining for gold. While some prospectors did strike it big, many went broke and never found a thing. The second way to capitalize on this big event was by selling picks and shovels to miners. This didn’t offer the huge upside potential of finding gold, but it was less risky and still profitable.
I see the same dynamic unfolding in today’s cannabis industry. You have companies that are looking to strike it big with direct cannabis sales, and you have companies sitting in the shadows while playing a supportive role and making money.
One pick-and-shovel cannabis stock is burning up the charts and I see more gains ahead.
ScottsMiracle-Gro Co (NYSE: SMG) should be a familiar name to most readers. Scotts sells consumer lawn and garden care products and materials in the US. It is one of the largest companies in the industry with a $6 billion market value.
Founded in 1868, Scotts has more than 150 years in the industry. For most of that time, Scotts has been providing consumers with basic gardening supplies and lawn care products.
In recent years, Scotts has recognized a market opportunity and has quickly grown into the largest distributor of hydroponic products in North America. According to a 2018 article by MarketWatch, hydroponically grown cannabis plants “grow up to 50% faster and produce higher yields of better quality,” than those grown in soil. This performance advantage makes hydroponics a worthy endeavor for growers. It also increases the demand for hydroponic supplies and materials.
Scotts owns the Largest Hydroponics Company in North America
Scotts’ hydroponics business operates under a subsidiary called Hawthorn Gardening Co. The company formed Hawthorn in October of 2014 and proceeded to invest hundreds of millions in acquiring industry-leading hydroponics companies and brands.
The biggest acquisition happened in April of 2018. Hawthorn purchased Sunlight Supply, an industry leader in hydroponics equipment, for $450 million.
The acquisition created the largest hydroponics company in North America. Here are some more details from the press release.
- Combined company will have annualized sales of approximately $600 million and directly service more than 1,800 hydroponic retail stores in North America
- Management to launch ‘Project Catalyst’ to drive synergies of $35 million and $0.60 to $0.80 improvement in non-GAAP adjusted EPS for fiscal 2019
- Transaction valued at $450 million includes $25 million of SMG equity
- Sunlight management expected to join ScottsMiracle-Gro upon completion of transaction
“We are creating a game-changing moment for ScottsMiracle-Gro, for Hawthorne, the hydroponic products industry and the users of our products,” said Jim Hagedorn, chairman and CEO of ScottsMiracle-Gro. “Combining Hawthorne’s industry-leading product portfolio with Sunlight’s unparalleled distribution capabilities and complementary portfolio will benefit consumers and all stakeholders in the hydroponic marketplace. It reinforces our confidence in the future of this industry and takes Hawthorne to a new level as a business with unique competitive advantages.”
The early results of the acquisition look very solid. Hawthorn has evolved into Scotts’ fastest-growing business unit.
Scotts’ fourth-quarter US consumer segment sales increased 8% year over year. More impressively, Hawthorn sales jumped 41% from last year, climbing to $199 million.
Hawthorn is seeing even better gains in high-growth cannabis states such as California and Colorado.
“We continue to see outstanding performance across all product categories of our Hawthorne business in the United States, with double-digit growth in long-standing markets such as California and Colorado and even stronger performance in emerging markets like Michigan and Florida,” said Jim Hagedorn, chairman and chief executive officer.
Here’s a link to the full earnings report.
With Hawthorn sales surging and growing in contributions to overall company sales, Scotts is quickly strengthening as a direct “pick and shovel” play for the cannabis industry.
Scotts Delivered Big Gains in 2019 While Broader Cannabis Sector Struggled
The strong results from Hawthorn have fueled an impressive performance on the chart. While the broader cannabis sector struggled in 2019, SMG was on fire, jumping more than 60%. Shares are already up 14% in 2020.
The Big Picture on Scotts and Hawthorn
Scotts has quickly evolved into the largest hydroponics distributor in North America and sales are booming. I expect more of the same moving forward as more states go legal and the US cannabis industry expands.
While some companies are risking it all to strike it rich, Scotts is sitting back, supporting the industry, mitigating risk and making impressive gains. If you’re looking for a pick-and-shovel play for the cannabis sector, Scotts may be it.
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Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.
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