Scotts Miracle Grow SMB

Notes on SMG buy back

by Doug Lyon, PhD

Workproduct of DocJava, Inc. Copyright 2006

Income growth is expected to be 11 to 13%

This is based on a move toward an increase in corn planting (an activity that requires more nitrogen).

The PE Ratio (price 51.10) is now 26.10.

Present div is 0.50 cents. If we add the div to the EPS we get 1.96+0.50 = 2.46 per share. This gives an adjusted PE of 20 (51.10/2.46).

Based on the above analysis, we might conclude the stock is fully valued. However, div will increase because of a Dec 12 announcement;

The cash dividend of $250m will be paid after 500 million dollars of stock is purchased, by 3/31/07.

Buying $500 M in stock is going to reduce the number of shares outstanding by 9.8 million (at $51/share). There are 66.3 M shares outstanding. Thus, the number of shares outstanding decreases by 14.7%. This leaves us with 56.5 million shares (est.).

The net effect is to adjust the PE ratio of 20 down by 14.7% to a PE of 17. The stock valuation has started to improve. This is an EPS of $3.30.

On the remaining est of 56.5 m shares, we are paid a one time div of 250$ M. This is $4.42 per share.

This provids a one-time EPS of $4.42 + $3.30 = $7.72 (for the year). The total number of shares left is est at 56.5 million. This gives me a PE ratio of 7.3 on a stock with an est. 11-13% income growth.

An 11% growth on $3.30 per share is $3.63 per share, for next years earnings, not including increased debt from restructuring or one-time div payment. The historic PE multiple is at the low-end of 15.5 to 17.5. Using the lower number (15.5) and an est of 3.63 per share (not including increase in debt service) we get $56 per share.

The plans require the recapitalization of the Company's balance sheet and include completion of a new credit facility of $2.1 billion.

Having 2.1 b credit and borrowing 2.1B are, indeed, different. However, with a $750 million dollar expense on the bbk and dividen, that money will go fast! At 6%, 2.1 B requires an interest payment of 126 million/year. Suppose they only borrow 1 Billion (only). That is 50 million / year, with 5% interest. With 56 million shares outstanding (after the BBK).

How will the debt impact the EPS? Without knowing the amount that SMG will borrow, in total, and the interst rate that it gets on that amount, interest expenses are just a guess. Last year, interest expenses were 1.5% of net sales, at 195 million.

Increasing debt in order to return captial to share holders appears to be thematic, now a days. Recall Laidlaw (symbol li) which re-purchased $500 million worth of shares (19 million shares) on 10/31/06. The stock went to $26 (from $28) by November 3rd and has almost hit $30 since. This BBK was financed via debt.

It seems that short term corrections occur soon after deals like BBK's expire. The question of how the dividend impacts the stock price remains open.

March 28th, 2007 is a Friday. SMG should probably not be held (for short term profit) much past then.

After the expected post dividend correction occurs, smg may well be a buy, again.