The Scotts Miracle-Gro Company (NYSE:SMG)

Shaftsbury (21.84) Submitted: 1/1/2009 10:18:48 PM : Start Price: $27.84 SMG Score: -8.87

There are several fundamental issues facing this company that have the "glass is half full" crowd pushing SMG up close to 50% from its lows. For example, investors ran the company's stock up more than 10% when an announcement was made in November regarding SMG's plan to offer a private label alternative. Granted, this move will likely take market share from SMG's competitors, but it may well also take share from it's own high margin premier product. The company claims that it will successfully raise prices in 2009 even as it sees a drop in sales with a net positive impact. The company also is significantly leveraged, but says it should remain in compliance with its loan covenants. While commodity prices have come down, the company acknowledges that it hedged a material amount of it's 2009 commodity costs at prices well above today's spot prices.The glass half full community looks ahead to lower commodity costs for SMG, higher prices for its branded product, and improvement in production utilization through the introduction of private label production.When all is said and done, SMG, while excelling in name brand respect and recognition, is in a cyclical business that faces numerous obstacles. Aside from its current problems with government regulators, a dismal economy, and possible shifts in sentiment in drought prone states such as California, where water use versus lawn care issues may cause sales erosion in many of SMG's products I wouldn't be surprised to see the company's borrowing costs on the rise. At current prices, I believe SMG is significantly over valued.