Yet Another Value Podcast - Jon Boyar thinks SMG's stock is set to grow

Episode Date: February 7, 2022

Jon Boyar from the Boyar Value Group returns to the podcast to discuss his high conviction thesis for Scotts Miracle-Gro (SMG). SMG was a massive COVID beneficiary, and shares have sold off in kind with other COVID beneficiaries. Jon thinks the market is too pessimistic here, SMG's brands have Coke like market share, and the company has a rapidly growing "picks and shovels" cannabis business that he believes investors are basically getting for free at current pricesYou can find all my writings here: https://yetanothervalueblog.substack.com/My notes on SMG: https://twitter.com/AndrewRangeley/status/1489600380854013952?s=20&t=c24bhjV0UhOWlZWjgULoCwBoyar's interview w/ SMG's CEO: https://www.boyarvaluegroup.com/podcasts/james-hagedorn-scotts-miracle-gro-chief-executive-officer-and-chairman-of-the-board-on-the-tremendous-opportunity-in-the-cannabis-space-potentially-spinning-off-the-fast-growing-hawthorne-division/Boyar's SMG overview: https://www.lp.boyarvaluegroup.com/smg2021 Boyar's Forgotten Forty: https://www.lp.boyarvaluegroup.com/andrewwalkerChapters0:00 Intro1:35 SMG Overview5:50 Why are SMG's brands so dominant?9:50 Customer concentration risk for SMG11:55 What happens to earnings as they lapse the "COVID boom"?17:50 Discussing Hawthorne21:30 What is Hawthorne's moat?24:45 Federal legalization and Hawthorne's sales distribution27:40 Why is Hawthorne's growth slowing right now?29:45 Hawthorne's cannabis investment strategy34:00 How SMG got into Hawthorne and look at it long term36:20 Breaking down SMG's SOTP40:00 The rationale for a potential Hawthorne spin45:40 Closing SMG thoughts48:25 Other interesting forgotten 40 names

all right hello and welcome to the yet another value podcast i'm your host andrew walker and with me today i'm excited to have for the third time on the podcast my friend john boy hair john how's it going doing great thanks for having me again hey thanks for coming back on let me start the podcast the way to every podcast first a disclaimer to remind everyone nothing on this podcast is investing in advice uh you know everyone should do their own work consult their own financial advisor all that type of stuff and then the second way i start every podcast with a pitch for you my guest you know this is your third time on, which I kind of think speaks for itself as a pitch. But it makes you our second most popular guest of all time right behind Jeremy Raper, who's just running away with the title.

But, you know, I think one of the things that I wanted to pitch was, I know you've got the forgotten 40. I think you're going to talk about that. We're going to talk about one of the stocks in the forgotten 40. But it's a really nice product. It's a great way to start the year with kind of, it leads a little bit on the media and cable side, which is right up my alley. But it's a nice way to start 40 stocks, trading at reasonable values, probably good growth prospects, a nice quick overview of all of them. So I really enjoy that product. And I'm glad we can talk about one of the stocks on there. So all that at the way, let's, the stock we're going to talk about is Scott's Miracle Grow. The ticker is SMG. I was bugging, I was like, there's cable companies

in here. There's media companies here. Let's talk about them. But you were saying, no, SMG is the one I'm like most convicted on. I'm really excited to talk about it. So I'll turn it over to you. What is SMG and why are you so convicted on it? First, again, thanks for having me on the show. And yeah, no, Scott's Miracle Grow is an interesting name. And I guess to start with a little background, you know, just on our firm, one of the things that we're really attracted to our great consumer franchises, that's something that's critically important to us really, for a few reasons.

One, it gives them a sustainable competitive advantage. it's very difficult to replicate a great brand, takes a lot of time and a lot of money to do so. And, you know, especially the time we're in now where, you know, I know when we're talking yesterday, you know, what type of economic environment we're in and, you know, appears we're, you know, headed for some sustained inflation. And one of the ways, I think the best ways to invest in a period of sustained inflation is, through companies that have great consumer franchises as they have the ability to raise prices. In fact, they just announced for the third time in a year that in their core consumer business that they're going to be raising prices. So that's...

I was going to say the exact same thing. I was reading through the earnings call last night and they said third price increase in the year. And I was like, oh, if that's not a sign of a little bit of pricing power, I don't know. What is? Three in one year. Wow. Yeah.

No, I mean, that speaks to the power of the brand. I mean, they have, you know, everyone really knows about, you know, Scots, they're traditional. They call it their consumer business. You know, they have four brands that, you know, each, that comprise most of their sales, each of which has kind of like Coca-like market share. They're also, you know, involved in the private. You just want to list those four brands just for a list of them. You have Ortho, you have Scots, you have, you know, all those types of brands.

that if you go to any home and garden center at Home Depot or Lowe's, which are, you know, one of the things that's a little risky is, you know, they comprise about 40% of their sales in just those two retailers alone. But the powers of the brand are fantastic with them. And, you know, Roundup, you know, they're the exclusive agent for Monsanto in them as well. That's about 10% of income or so. So they have these great brands that anyone who's a gardener or who does any sort of, you know, outdoor type of stuff knows very, very well. And stock, you know, in April of 2021 reached about $253. It's now high $130s, low $140s or so. It's been, you know, trading around a bit. And I'll talk about the reasons why later on. But just going back, it's been a huge

pandemic beneficiary. They picked up about 20 million new customers during the pandemic, and by their surveys, et cetera, they think about 86% of them are going to stay. In addition, millennials are huge for them. You know, I went back. And I looked at, you know, we've been following this company since about 2010, 2011. We've written research reports on them and owned them for stocks, you know, full disclosure. I own it. My clients own it, et cetera. You know, one of the things that we were talking about as a catalyst is the baby boomers retiring.

You know, that was a big deal. They're literally going to retire and watch the grass grow. But now it's millennials that are driving it and they have things like edible gum. gardens and things like that, which are a huge growth area. And this was a business that they thought was going to be a one to two percent grower, you know, going forward. Now they've kind of said this is going to be, you know, a two to four percent grower going forward. So that's a huge shift, you know, over the last couple of years. It's a great way of playing demographics, et cetera, you know, all the millennials moving to the suburbs, having homes. And it's, you know,

that's one part of their business. Let's focus there because there's lots to talk about. We haven't even started talking about Hawthorne yet, which I think is the more exciting growth, you're part of the story. I listen to your podcast with the CEO from, I think, early December, and he's fantastic. I mean, I'm surprised I don't hear more about him

with the outsider type stuff, but we can get all there. But I want to dive into the, you've obviously started by focusing on the core business, the Scott's Miracle Grow, the consumer side of the business. And I just want to start there with, two risk factors. I think he were starting to address them, but just to dive in a little different. The first is, you know, you mentioned these guys have Coke-like share with their

brands. And I get it. Like Scott's Miracle Grow. I've seen the ads. I get that. But at the same time, my mental model is like the best brands are things that you personally consume or display, right? So a Nike would be a display. That's a status symbol. Obviously, the super high end, like, Armais and stuff stuff or status symbol, or stuff you consume. So a Coca-Cola. You know, everybody's got the taste test where like Coke and knockoff Coke tastes basically the same. But because Coke spends so much on brands and you put in your body, you prefer that over a generic or even something like Tylenol, right? Tylenol is ibuprofen, right?

But nobody really, I mean, people do take generic ibuprofen, but most people go for the Tylenol that's consumed. When I think about Scott's Miracle Grow, like it's one of those things, I'm surprised that there's so much brand strength here just because nobody knows if you're using Scott's Miracle Grow or a knockoff, you know, it just strikes me as one of the of those things that's very right for private label disruption and that type of stuff. So I said a lot. I'll turn it over to you on why the brands are so strong. Well, you mentioned displays, which are interesting. So I guess one way I say is people's lawn, if you look at it, Scotts would say you'd be

able to tell if you're using a cheap knockoff as grasses and greener, it's not growing well, that their products are actually better. They're involved in private label. They do produce private label. that's one of the things that they do for both Home Depot and Lowe's. But the product is inferior. And the other thing that's important is, you know, if you're doing some lawn care, et cetera, you're essentially doing it once or twice a year. You have one shot of doing it. And you really want to cheap out and pay a couple dollars less and have the risk of your

lawn or your garden looking terrible because that's like a showcase for your home. Why are their products so much better than the private labels? Because I know obviously there's chemistry and biology and stuff in here, but it doesn't strike me as crazy hard chemistry or biology. You know, Scott's Miracle Girl was around in the 80s and 90s. I'm not sure you've seen like leaps and browns improvement. Why is it so much better than private label? Or is that just something they see?

Like, are there actual studies that show that these are better than private labels? Yeah, I mean, they also produce a lot of the private label. I don't know the exact share of it. but they produced a fair amount of it, and they purposely make the ingredients less powerful, less, you know, not as good. So it's, you know, it's part of their strategy. And one of the things that's, you know,

interesting, one of their competitors, central lawn and pet or garden and pet, in their filings, they actually put as a risk factor that Scots basically owns the category. Yeah. It's very hard for them to compete. compete. So whether it's perceived or actual, and I think it's probably a little bit of both, you know, they spend lots and lots of money, not only on marketing, but also in research

and development. Central is the brand, is Spectrum brands instead? Am I remembering that correctly? Yeah, I think that's another one. Central Home and Pet, I believe, is the... I thought it was a division. I could be wrong. I thought it was a division of Spectrum brands, which it's just top of mind because I think they announced the spinoff this morning, so I've been meaning to go back and refresh. Let me turn to the second risk factor I want to talk about. And you mentioned private label. They make private label for Home Depot and lows. I think you've addressed the private label side, but I do think there is, you said it, Home Depot lows, 40% of sales. That is a lot. I do worry that this is a category that people could be prone to switch to private label.

I think you did address why they might not want to for a couple bucks, but I'm still a little curious. I want to talk about the concentration risk, and I know somebody just tweeted at me. said, hey, actually, if you case study this, Walmart tried to private label in 2017 or 2018, and then kind of like begging back to Scots and saying, this has not worked at well. So if you want to talk about Walmart in the context of private label risk, I think that'd be great, too. Yeah, I guess you have to really look at the private label risk. I mean, it's certainly important, you know, just talking about it. I mean, look what happened with foods and supermarkets and things like that.

Everyone thought they had these great consumer brands. and then, you know, supermarkets decided, you know, why don't we produce this ourselves? This is not like making a cracker. This is a lot, a lot harder. But going into concentration risk, it's roughly 40 percent, two stores. They also had to do a fair amount with Amazon. Part of their strategy is to be fantastic partners. If you go into a Home Depot or a Lowe's, you know, you'll be greeted by, you know, Scott's actual employees who are there who are helping them out.

actually being used as a resource for Home Depot and lows that help drive sales and they help bring people into the store. These people are enthusiastic about their, you know, about their garden, about, it's one of the purchases they actually kind of like to make. It's done in the springtime. The weather's good. So that helps, you know, mitigate it. And, you know, I think the proofs in the pudding, they, you know, raised prices twice so far. They're just instituted a third price. increase their biggest, you know, 40% are in Home Depot and lows total. So if they're able to do that, it seems like they have pretty good negotiating leverage. Perfect. I want to turn to Hawthor in a second, but I guess we might as well stick with risk factors because this will apply to Hawthorne as

well. Both the core business and Hawthorne, and we'll again talk Hawthor in a second, were massive COVID-Benter fishers, right? And you mentioned the stock's gone from 250 to around, I think it's like 135 list I checked. It's a huge drawdown for a consumer staples franchise. Obviously, a lot of people are seeing, seeing their lapping COVID, the comps are going to be negative. And I just keep thinking like in, I think in like 2019, so pre-pandemic, they earned about $5 per share. And then their trailing numbers are probably around $9 per share in earnings. And there's, there's all sorts of movements. The price increases, they've done acquisitions. But I guess a lot of people look and they, you know, the mental model, not the mental model, but the thing I've got in my head

is Peloton, right? Huge COVID beneficiary. As soon as they start laughing, they've way over invested into their supply chain. People say, oh my God, this is going to fall off a cliff. And I could see something similar with Scott's Miracle, right, where you say, hey, maybe sales got too, too far ahead of themselves, a couple extra people who really don't want to be gardening are going to be gardening. They probably overinvested in their supply chain. And when things normalized like it's not going from nine to five. Maybe it's going nine to three is the super bear case. I don't think that's likely, but I'll just turn all of the thoughts on the COVID lapping over to you. Yeah, I mean, that's certainly a risk, but you know, one of the things I'd say

is you now have a shift of millennials moving out of their parents' basement or from the cities or whatever to the suburbs, creating new customers. That's huge for them. Two, if someone went to the trouble of, you know, producing a garden or doing that type of things, they kind of have some fixed costs and fixed time investment that they're probably going to continue doing this. You know, they created all this work and, you know, it's just going to sit there otherwise. So I think, and you're looking at their latest call, if you read through it, you know, their first quarter of the year is not, you know, a huge one for them, but they're looking at the point of sale data. They've been pretty impressed.

that people are staying with the category. So, yes, it's certainly a risk, and that's clearly what the street is saying. But, you know, I think the difference also with Peloton and this is this was an established company to begin with that was still was growing, not as fast as they said they were going to, you know, grow, but it was growing nonetheless. So I think the comparisons probably, I would think, ends there. But yeah, it's down from 254 to 130 and change, you know, for a variety of reasons, margins, worry about, you know, COVID comps, et cetera.

But I think if you really look at that price decline and you put, let's say, and we can talk about this in a second, a cannabis ETF over it, it kind of perfectly correlates. And that's because of the second business Hawthorne is really one of the ways. people have been playing cannabis and just you know I talked about consumer franchises and that's one way that we've invested a subset of that is great consumer franchises that are masked by a corporate name and this is sort of the case with Hawthorne Hawthorne is not known by most people but it's known by people who are in the cannabis business it's one of the best brands out there and that's

what makes this such an appealing investment. And the way that we look at it, and we can talk about valuation later, and I know we want to talk about the Hawthorne part, is essentially at these levels, you're purchasing the, you know, the Scott's consumer business and getting a fast-growing Hawthorn cannabis business essentially at zero cost. So to me, this is like the true value investors way of playing cannabis. Well, let's switch to Hawthorne. I do just one other, one last thing on the core business. I love what you said where people have made a time investment into the thing.

And I do think like there are some COVID beneficiary things that everyone was baking bread at the height of COVID. You know, maybe a, anytime you get new consumers in the store, I'm sure a couple of people are going to stick with the bread making going forward. But most people have probably dropped the breadmaking. but something like gardening that is something you've made a big investment you've got the house not everyone will stick with it but i think you mentioned or they mentioned on a call 86% of people are going to stick with it or something i would bet that's they're actually correct or you can move away from gardening like something like fishing tons of people took up fishing during the thing and yeah it probably less people stick with fishing than stick with gardening because there's a little bit of extra work there but i bet you a lot of those consumers are going to stick with fishing i mean you have to go buy a rod you had to go get a fishing license Like there's big investments there. And then, you know, fishing's been a popular sport for hundreds of years. Like once you pick it up, some people are actually going to like it. So it's not going to be a hundred for Scott's Miracle Grow. I bet you it's 75 or 80%. For fishing, I wouldn't be surprised if it's 40 or 50%. But yeah, no, I agree. In remote working certainly is helping for these type of activities that you might not have as much time for and people are spending more time at their home and they're investing in their home. The other, you know, one, another stock that was in the forgot 40. We can talk about.

but another time is Calloway Golf. You know, that is, you know, golf certainly was a huge COVID beneficiary. And, you know, I think a lot of people there are going to stay. So it's. And if you, if you took up golf, guess what? You spent a couple hundred bucks on equipment and stuff. You've spent hours and hours and hours. Golf is not a game.

You go and you pick up in, you know, three minutes. You've spent hours and hours practicing your swing. Maybe you hired a swing coach. Maybe you've, like, you've just sunk a lot of investment in there. And yeah, a lot of people. are going to churn, but I do think all these businesses have been taken up to the next level. Let's talk Hawthorne now. Hawthorne is, it's the cannabis play. It's the sexy part of the business. It's going to be rocky, but it should be a really growthy story for a long, long time,

great tailwinds. So, you know, what is Hawthorne? How do they touch the cannabis thing? Why is this brand so good? Yeah. Well, I think that's the thing. They don't directly touch it. They're essentially a distributor to a distributor. They have anything that you need to grow cannabis without actually touching the quaint is what they do. They provide a lot of lighting, filtration, air filtration, anything they need. And what's interesting is, at least in the U.S., because of, you know, legal reasons and banking and all of that kind of stuff, they don't, their customers, their direct customers are not the growers. They have about 1,600 or so kind of specialty, stores that sell this kind of stuff as well as Amazon, you know, dot com, where what they do is

they, you know, and 70% of their stuff is proprietary products. So what they do is work as consultants to the growers, tell them, you know, how much lighting, what type of lighting they need. This stuff is super important. This is not, you know, this is very technical things and it also relates very well with their other previous business. There was a quote in, I think it was their Investor Day, where they said, look, it's easy to grow cannabis indoors. It's not easy to grow good cannabis indoors. And their consultants are out there helping people, you know, providing you with the technical

knowledge and the tools to do that. Exactly. And so in Canada, it's different where they can sell directly the growers because less, you know, regulation there. But they work as consultants. They've quickly grown this to an over $1 billion a year business. It grew 100% over the past two years. They're making acquisitions.

They grew this pretty much from nothing. It's run. And one thing to take a quick step back is for better or for worse, and I think in this case, better, the company's about 25% controlled by the Hagendorn family. So you have a controlling shareholder there. And, you know, one of the things that he also said is, you know, in the last call, and I think it's super interesting, is you have to take an activist, he has an ability to take an activist approach at his own company. And, you know, Hawthorne is an example of this where, you know, he decided in early 2012, 13, around then, to get involved in this category. It's been growing. It's being run by his son, Chris, who seems to be doing a fantastic job. But it's, you know, It's a super interesting growth story. And they're also, they know who the really good growers are. And through debt and preferred investments, they're taking stakes in them because they can't

take actual equity stakes in these growers because of, you know, legal and banking regulations. But, you know, once safe banking passes and it will, I think it's a matter of time, that's a huge catalyst for them, just the value of their investments will go off as well. We'll talk, they are doing, we'll talk the investments second, because I do agree they're interesting, though, it's a little different than what everyone else is doing in the space. Let's stick with the core Hawthorne business, though. You know, I don't think it'd be crazy to say, again, they're providing the lighting, the airflow and everything.

It's a picks and shovel play on weed industry growth, right? I want to ask two things on it. First, and this comes back to a little bit, the moat question and the brand question. I asked about Scott's Miracle Grove, but, you know, a picks and shovel play, I get, everybody loves to provide the picks and shovel play, but when I see lighting, I'm like, oh, lighting isn't, again, it's not that technically complex. I don't think there's huge benefits to scale in terms of making the lighting. Obviously, people want to go with the lighting that's going to work the best, but I have trouble believing, like, buying lighting is something

that's really brandy. So I just want to dive into, like, what is the moat here? Because one worry I have is 2018, when the weave industry was in the doldrums to 2021, there's this huge boom. And they say we're the best business, we're the best moat. And one of my worries is, well, maybe there was just so much demand and it's so far out strip supply that you guys were just a huge beneficiary of this. And once like kind of supply demand normalizes, we're going to say, oh, these guys were just selling, you know, hardware commodities. And not that it can't be an okay business, but it's never going to be a great business. And the brand was a little overstate. That all make sense? Yeah, no, that makes perfect sense. And that is a worry of ours, but it seems that

kind of the same model that they're doing, you know, helping Home Depot and helping lows, you know, anyone can, you know, with enough expertise, create, you know, all sorts of lawn and gardening kind of products. They're doing the same thing with Hawthorne, and they're helping and being value added to all of the major growers out there. And they're kind of putting themselves in their process and their research and development process. And that's really what's going to be the, you know, sustainable competitive advantage. I mean, at the end of the day, cannabis is a commodity like anything else. But if you're able to have kind of a branded type of business that we're all going, we can help you, you know, be the best grower possible. I think that's a really

big mode. And they certainly have the first mover advantage. You know, so they're going to, you know, I think if they're able to take some of the same playbook that they did at their core consumer business, they should be able to do that in this business as well. This might be a little bit of a stretch, but is it almost like Hawthorne is a little bit of a consulting agency where they will, the real mode is they've got all the experts you can come into your business and tell you, oh, you're not doing this, you're not doing this, you're not doing this, this will improve your yield by 5%. And because that side of the business is so valuable, like people are going to buy this.

Hawthorne lighting and everything just because the consulting side is so valuable. Yeah, I think that's exactly what they're trying to do, especially since they can actually take physical order from the growers now. They have to do it at the, at these, you know, 1,600 or so stores. So let's talk about that. Obviously, federal legalization, I think would be a big catalyst for Hawthorne. But I do worry, you know, like I believe when states legalized, the, legalized cannabis, their business actually initially drops as all the illegal growers stop buying and then it takes time to go and find the new legal growers and build and that takes a while. I do worry, like, federal legalization comes in. And right now, Hawthorne has to sell through

distributors who then sell it to the end users. Federal legalization comes in. And Hawthorne said, then we can start going and selling directly to consumers. But does that moment of, you know, uncertainty and change, does that present an opportunity for other people to come in and beat them to the direct-to-consumer punch. I think they just have a direct-to-distributor. I'm sorry, direct-to-grower punch, the direct-grower punch. Well, they have all these established relationships and through, you know, their investment in that Canadian company that's taking these stakes in growers and other brands, you know,

they kind of have the inside track there. So I think that they're, you know, they have a huge head start. And listen, there are plenty of companies, if you look at the history of business, that were the first movers that didn't end up becoming a long-term competitive advantage. But in this one, I think they have such a good head start. And, I mean, it's already a billion dollar a year business from basically nothing, you know, 10 years ago is is pretty impressive. And it doesn't necessarily, you know, I think Jeannie's out of Balakata, whatever the expression is,

you know, we're not going backwards in terms of cannabis regulation. It would be, I think that's highly unlikely. It's just a question of degree, how many more states legalize it. I mean, New York is going to be legalizing, I believe, sometime this year. That should obviously help the business a lot. But it's really the safe banking reform that will be the big driver for them. I mean, when I had him on the podcast, I mean, I had no idea that essentially if you are a business that grows cannabis right now in the U.S., you can't deduct any of your expenses on your income tax

return. So effectively, you have an 80% tax rate. I mean, how does that work? I mean, it's just silly that they haven't had a comprehensive reform on this. This is something that shouldn't be in this kind of legal limbo. And, you know, at some point in time, I mean, I think part of the reason why the stock went down from, you know, 254 to 130, 140, wherever it is now, is there was a lot of excitement that the Biden administration would be able to, you know, get safe banking, get federal

cannabis reform. And clearly that's not happening anytime soon, but at some point in time, it will happen. Yep, yep. Aaron Edelheid's been on the podcast and talked about cannabis plays a couple times. One of the things, like, I'm making the numbers roughly up, but he's like, look, you look at all these cannabis plays, they trade for five times EBITDA, they're growing 40% a year, but because they can't deduct anything room taxes, it's like they trade for 5,000 times free cash flow or something. But if you assume they can ever start deducting, it gets very interesting. On Hawthorne, right now, they are going through a gross slowdown, right? And I think the argument is, hey, things went crazy good during the pandemic. Everyone was

buying lighting. They were buying ahead of time, all this sort of stuff. There's a slowdown right now. And I believe that, I get that. But, you know, it's a picks and shovel play. And it's not like demand for cannabis is slowing. You know, I get that the industry is struggling because they probably over, got into oversupply, but I'm still just a little surprised that a picks and shovel play is having a slowdown when the industry is so immature and seems to be growing so quickly. So can you talk a little bit about the current slowdown at Hawthorne? Well, the current slowdown at Hawthorne has a lot to do with, there's just a big black market supply of of cannabis out there. And that's, you know, impeding things. You know, the legal

growers aren't buying as much. But it's also, it grew so quickly so quickly in such a short amount of time. I mean, there's going to be kind of growing pains. This happened to them 2018, 2019. And it, you know, just look at this. The business grew 100% over the past two years. This is not going to be kind of a straight line up. And, you know, they're forecasting. And so far, you know, they're generally pretty, you know, the straight shooters there that second half of the year, there's going to be a turnaround. And, you know, it seems almost inevitable because you're just having more and more states legalize cannabis. So, and also part of the, you know, the issues are just going to self-correct.

where you have a big oversupply cannabis, this is a product that has, I think, a one-year shelf life. So at some point in time, you're going to have to regrow the cannabis, and that should help them. Perfect. Perfect. Last thing I want to talk about on the Hawthorne side, and then maybe we can go into some of the parts, and there's a couple other things I want to talk about. But on the Hawthorne side, you mentioned they put $150 million, I believe, into a strategic investment into RIV capital, which is a big kind of like weed incubation. I would say, and they're taking other, as you said, they can't take equity stakes, but they're taking lots of convertible preferred or convertible debt where the second safe is regulated. They can flip it in and they'll have lots of stakes and people. It's an interesting strategy. I understand it exposes them to a lot of growth, but you know, at the same time, I know a lot of people would say, hey, how many picks and shovel plays actually need to go, you know, invest equity into their, you know, Amazon AWS isn't exactly taking 10% equity stakes into every company who comes and gets on to AWS. So just want to talk about that strategy a little bit.

Well, I think it seems more it's opportunistic and that they know who the good growers are. And obviously it helps them get customers later on in life. But if they're able to see who these big brands are going to be five or 10 years in the future and they're able to get them at really reasonable rates because there's no great outside funding available for them, why not? This shows them being opportunistic. And this is why we really like kind of family control businesses because they're looking two, five, ten years ahead and not looking to kind of maximize earnings. It would be better if they, you know, in the short run, if they just did a massive share buyback here with that $150 million, you know, they put it in to RIV or whatnot. but instead they're investing kind of into the future, which I think is the better move. Yeah.

And in this case, like, I use AWS as a counter example. AWS customers, they're not exactly having trouble raising venture capital money or anything, right? Whereas a lot of the Hawthorne customers, you know, there's absolutely no capital. You cannot borrow from a bank because of all the safe stuff. So it's possible, you know, Hawthorne, Scotts Morocco girl borrows, what, like 20-year paper at 4% or something? These are investment-grade people. they're taking that and they're obviously it's very risky but they're lending to people who are going to buy their products and they're probably doing it at like 20% plus like kind of I don't want to

use loan shark but very attractive rates probably risk adjusted this is a really good bet especially when it's growing the Hawthorne moat. Do I have that right or do you want out anything there? Yeah, no it's it's really kind of a tale of you know two credit markets really out there. I mean there was a really interesting article in the journal today about zero a coupon on what is it, convertibles where, and I never understood this because I think Dropbox did it and a couple others. There are a whole host of companies out there over the last two years that have been able to issue convertible securities at zero percent interest rates. It's absolutely insane. Those are the AWS customers. It's only not true in the cannabis space. Or we talked about

Peloton did it, and a bunch of other growthy companies did it. They all did it in February 2021. Volatility was insanely high because of the meme stock squeeze and everything. And for a lot of them, it's been an absolute lifeline. You know, Peloton issued, I think it was a billion dollars of debt. And I think it converts at like 130 or something. Go look at the Peloton stock price. I don't think that's converting into money.

But because the volatility was so high, they could do that. And they could get stuff that really funded them and help them. And you're exactly right there. I wonder just going back, who was the buyer that? It was convertible arms guys, right? They bought it, and then they instantly, I'm sure they instantly shorted the stock or sold lots of options around because the IV on the stock was so high. I think you could do stuff and kind of create it and get a really attractive yield on it.

So I'm sure there were really smart, mathematic guys was like PhDs and finances who were figuring out risk-free ways to buy these things and generate like 5% annualized and they were borrowing at 2% or something. I just want to, one thing you mentioned, this is a family run business. They look with a two, five, 10 year. And again, I listened to your podcast with the CEO. I thought he was a hoot. He's, he might have, you might have to censor him if he's on TV for too long or something. But there was one story he said where his board went to him when he was about to invest into the weed industry. And his board was like, hey, we, we want you to, I'll let you tell it. But I thought it was really instructive of how they look long term and probably what they're seeing, the bet they're thinking about with the meat industry today. Yeah, no, originally they basically said no way. The board said no way, right? The board said absolutely no way, but he effectively controls the board, but he tries to have built consensus, but he thought it was just such a great opportunity. He was visiting, I guess, some stores out, I think, in the Pacific Northwest. And he just saw that people were spending money

hand over fists on this thing. And he decided to, you know, say, no, we're doing this. He did it slowly. And he, you know, he stepped on the gas when he needed to. And, you know, there are certainly issues when you have family run businesses where, you know, in the short and medium term, you know, it could frustrate, you know, people. But I look at them and their long-term records, they're fantastic capital allocators. When the stock was in the 240s, 2.50s, they're talking special dividends. Now they're talking stock buybacks and no special dividends. So this is, you know, they treat us the money like it's their own. And you know, it's 25, 30 percent is their own. I think, I think in that story where he was going to the, when they were about to get in Hawthorne and

they were talking to growers and stuff, I love where you'd go to the people who are buying like, you know, all these systems in straight hard cash. And you'd be like, what are you buying these for? They would just stone face look at it. You'd be like, we grow a lot of tomatoes. grow a lot of tomatoes. We need lots of hydroponics to grow tomatoes and we buy in cash. I just love that. Yeah, the tomato business ended up being very profitable. Let's talk some of the parts here, right? So high level, $135 stock. I think EPS is around $9 per share, so 15 times earnings. That is not a lot. That is probably on the cheap side, given they borrow it again, 10, 20 year paper at like 4%. This is a consumer brand, you know, go look at a Procter and Gamble or a Coke or something. It's a consumer

brand that they now think can grow 4 to 6 percent and it's got this really interesting cannabis play. Let's dive a little bit further than in just the headline P.E. number and talk, there's the Hawthorne side, the cannabis side, fast growth, and the Scotts miracle side. How do you guys look at the overall value here? And this will be effective because they might spin off Hawthorne at some point. So this can build into that conversation as well. Yeah, no, no, absolutely. And if you want, you know, we recently issued a report on the company, I think in a full length, I think in July, I may have sent it to you if you want to have it so your readers can see it. I'll have to give you a link to it. If you give me the link

for listeners, I'll be insured to include a link to the Scott's Miracle Note in the show notes, and I'll also include a link to the Forgotten 40 if you're interested in that in the show notes as well, just for any listeners. Yeah, yeah, no, no, fantastic. This way they can actually see the assumptions that we do, et cetera, on it. But we look at everything, and this is the way our research and our money management arm works through the lens of an acquire, what would a knowledgeable business person pay for the entire business? And, you know, basically, you know, we estimated what 2024 EBITDA was going to be for both consumer and Hawthorne.

I don't have the assumptions off the top of my head, but they were not heroic assumptions by any way, shape, or form. and taking, I think, a 14 times on the consumer and a 15 times on the Hawthorne. Is this 14 times? I'm guessing net income, but I just want to drive that home. Yeah, yeah. Yeah. It gets, EBITs gets us to $243 a share or so.

I mean, could be wrong, 10% plus or minus, but you have $130 some odd dollar share price. and you have, you know, we think it's probably worth in the 240s. And, you know, the thing that's critically important to us is, you know, for any of these, you have to worry about value traps, especially in family control companies, is the catalyst. What's going to make the stock ascend in value over a reasonable period of time? And to us, a reasonable period of time is, you two, three, four years. And one of the catalysts, besides the legalization, you know, safe banking, all that kind of stuff, is they said they might split the company up over the next one or two years into two businesses. And I think it makes a heck of a lot of sense to do it,

even though there will be some disinergies as, you know, that businesses are related. But it it makes a lot of sense because maybe not at this moment in time. These cannabis shares are out of favor, but at some point in time, you know, the market's going to value these things very, very differently. Let me push back on that because, you know, I'm a big fan of spin-off, and big fan of financial engineering. You know, you and I've talked about IAC a lot before. I love that IAC, they build companies up and then when they're ready to stand them

own, they spin them out. They're not trying to concommodize. But I did, the Hawthorne spin was interesting to me, right? Because I get it. If everybody's trading cannabis companies at 100 times EBIT post-legalization or something, you want to spin this off and you want to capture that multiple. But on the other end, like, you know, the great builders that I've seen, they kind of ignore, hey, the market is, the market's a little hot for this side of the company. So let's try to play into that and financially engineer it. Like they look towards long-term value. And I think they said, because research between Hawthorne and Scott's Miracle Grow, it makes sense.

There's a lot of overlapping research and distribution and stuff. They said if we split these two businesses, I think it would be $50 million per year in dysenergies. And like $50 million per year, this is a, I think it's a $6 billion market cap company or something like $50 million of year in disinergies and cost. That is a lot of money. So I was just a little surprised because the CEO, go read some of the stuff he says, go listen to John's podcast.

This is the guy who, like, kind of has, he fits the outsider's type mold. And I was just a little surprised that it seemed like he was willing to entertain a split with a lot of disinergies for what it looked to me. He wanted to catch a sexy growth stop, sexy growth pop or, you know, catch a multiple that may or may not be there if that makes sense. Yeah, I think the reason why he wants to do it is not necessarily to, you know, get a necessarily a shorter term, a higher stock price. it's that if he wants to take stakes in some of these other businesses that are kind of wildly inflated, he needs his own currency. And he's just not going to get that currency as part of kind of a quote-unquote conglomerate. Why does he need his own currency? Because like your own currency, you mean he needs Hawthorne to be able to issue equity to buy these things. But why does he

need his own currency? Because I look at the RIV capital deal. We talked about how right now all these companies are cash-starved, right? They'd rather cash is gold to them. They'd way rather cash than like partner for equity. And Scott's, as a whole conglomer, I've said several times, they borrow 10, 20-year paper at really low cost. Like, it seems to me they don't need their own equity. They just need the low-access cost of capital to keep funding all these deals. Well, I think the market would just value them so much higher that they'd be able to use the equity to buy some of these other businesses that are not so advantage. And, you know, he was talking on the podcast about some of these businesses that are, you know,

being sold for a billion dollars, two billion dollars. And, you know, the whole enterprise value, Scott's itself right now is only is $10 billion or so, you know, when you include the debt. So I think, you know, he wants to be able to, you know, have a seat at the table and not be minority partners with these folks and be able to take majority or, you know, somewhat controlling interest. It's a tough call. I think at the end he's going to do what's right for shareholders. Obviously, there's also family issues involved, like he wants his son to stay at the company. But I thought another thing out there is one, you get different.

There are people who will not invest in Scots right now because of cannabis. You know, I know from selling my research, there are people who I start talking about it. The minute I say cannabis, they say stop. That's, I think, a huge part of that story. And two, I'm not saying he would do this, but think about, you know, it's a parlor game. What kind of business would Warren Buffett buy or Berkshire would buy? Scott kind of fits that to a T, the traditional consumer business. You know, maybe one day, because it seems like the sun is very enthusiastic about the cannabis business,

less so about the regular business. Maybe one day they sell the consumer business. I'm not saying to Berkshire. That was just as an example. And that's a way for the company, the family to cash out and run with Hawthorne. It's so funny. You say Berkshire. And I agree, Scots would make a great candidate for Berkshire. But honestly, Berkshire is so big at this point. Scott's a drop in the bucket. I don't even know if Warren Buffett wakes up for that phone call anymore. It's just funny. Yeah. The other thing, I do remember on your podcast, he talked to, the CEO talked about how 2007, I think Henry Kravos approached him, was like, hey, let's just take this thing

private. You're going to make so much money. We're going to lever it up, take it private. And he said, I get you, but, you know, all you're going to do is take out a bunch of cheap debt from J.P. Morgan, and then you're going to be my boss. We own 20, my family owns 25% of this. Why don't I just go take out the cheap debt from J.P. Morgan myself, special dividend out to this out to my shareholders will still be in control and our public shareholders who trust us, like we'll kind of be rewarded over the long term from that. I just thought that was a really interesting way of showing like how they do think about the long term and creating long term value and kind of partnering with shareholders. I don't know if you want anything there. Yeah, no, I just think that

that shows their long term mindset. And, you know, he was 100% correct in that kind of, kind of assessment. You know, you have to think about it now, though. He's, you know, that was, you know, 13, 14, 15 years ago. He's not getting any younger. He's has to. think about secession planning. He has the son who's, you know, shown a real interest in the Hawthorne business. So this could be a great way for him to ride off in the sunset. I'm not saying this is what they're going to do, but it's at least an option and would kind of, you know, another reason why that $50 million a year and this energy might not be as big of a deal. You're totally right. And, you know, as you said, it's not just Berkshire who would love to take

the Scott's core business. This is every private equity firm, but love to slap 7x turns of leverage on this, buy it, and probably go on a little bit of a bolt-on acquisition spree. I'm sure there are plenty of consumer brands. Nothing like jumping right off the top of my head, but I'm sure there are plenty of big consumer brand companies that would love to buy this for the relationships, the bolt-on. Like, there would be synergies with other buyers if you want to split this off into two. So I definitely hear you there. Jen, I think we've been talking for almost an hour at this point. I think we've done a really nice job of covering all the different pieces of Scots. Anything else on Scots we should be talking about before we kind of

wrap this up? No. I mean, listen, I think this is not one of the stocks that's going to, you know, that I'm saying is going to double overnight or anything to that. I think this is a great. Are there any stocks that you say would double overnight? I'd love to go check those stocks out. No, no, no, no. I'm just saying, I think this is a great long-term risk reward story. It picks out a lot of the boxes that we look for investment, great consumer franchises, family control, things like an owner. So I think it's a really something to be, you know, to look at. And I think, going forward, this is where I think investors are going to be making the money and stocks that are kind of outside the major indices or low index weighting. And, you know, that's kind of things I think

investors should be paying attention to. Maybe it's just because I've been more focused on like eventier stuff recently. But I am surprised I haven't heard more about Scots from, you know, the people who love to buy and hold family run long-term compounding business. Like here you've got a CEO who go read some of the quotes I posted or go read the investor day. It's a CEO who talks very openly and honestly about trying to create long-term value. He views long-term value. Pre-cash flow growth over time is what's going to do it. CEO who's beat the indexes, you know, over the past 20 years, the stock's up like it's a 12-bagger, whereas if you invest in the Russell, that's under five. So he smashed the indices over long-term. I'm just surprised I don't hear more people kind of talking

about it in the, yeah, you're probably not going to make, as you said, a double overnight or a double in a year, but you're probably going to do really well over time with less the risk than the indexes. I wouldn't be surprised if you outperform pretty significantly over a five-year period or something. I'm just surprised I haven't heard more about it. Yeah, I mean, I think a lot of people just, you know, don't want to invest in family control businesses. That's one of the things they don't like that. But yeah, I'm not really, I'm kind of perplexed. It's a brand that almost everyone, at least in the U.S. knows or, you know, it's a great brand. So, yeah, I'm not sure why it hasn't gotten the attention, but I guess it's not a meta. It's not, you know, it's not

Google. It's not, you know, any of these kind of, you know, high-flying businesses, but sometimes boring is okay. Meta's market cap drop, what was it? It was the largest market cap drop of all time, $250 billion on earning. So maybe it's a good thing. It's not a meta right now. Absolutely. Yeah, it's, no, it's absolutely. Crazy. But yeah, no, I think it's a really interesting idea. And, you know, thank you for, you know, inviting me on to talk about it. I'm going to let you go once again. But before we do, I just want to bring it back to the forgotten 40. Obviously, we talked about one of the 40 stocks. What else on the forgotten 40 is really interesting to you these days? I mentioned Callaway as a as one that I think is, is interesting. We know, we've talked about in the past before, you know, you and I, you know, you have different feelings on another family control business that both Madison Square Garden. sports and entertainment, you know, are interesting.

The Dolans are, you know, have their own set of, their own set of issues, but they have a fantastic asset. Did you see my, did you see my podcast with Chris McIntyre on MSG? I think I introduced you guys separately, but did you see that? I spoke to him. I haven't seen that. He talked about E or, or Astro? He talked about E.

He did really good work, I thought, just on how a lot of the debt at E is non-recourse. So even if you ran into a disaster, you're buying this. And, you know, the garden assets are great, the Rockets. I love the Rockettes. I'm with, gosh, you know, every time I look at those, they play exactly into my worldview of like where the world's going and the compounding assets over time. But, man, the Dolans have just really burned me out. And the Knicks have been such a bummer this season.

It's hard for me to get excited about them. Yeah, I mean, I know, you know, after talking about cannabis, you know, talking about sports gambling is probably, I don't want people to think I just invest in sin stock. But, like, that's a huge, you know, growth engine, both for EMS, it's regarding E and S. I mean, if you look over the last month or so, you know, how many people signed up for Graph Kings and all these other things because they legalized sports gambling in New York. This is going to be the premier place to advertise it. And, you know, with giving nine, was it nine licenses in New York, they just instantly got nine customers to sponsor them.

I did a few posts on the giveaways that the sports gambling companies were giving. It was crazy. But more than that, the advertising is out of this world. And, you know, people don't think about things like the Staples Center. They get that crypto partnership for, I think it was $250 million over 10 years or something. I can't remember the exacts. But, you know, A, Madison Square Garden doesn't have that. But 10 years ago, if I had come to you and been like, hey, these companies are going to be getting $20 million per year from a crypto firm, you would have said,

crypto? What's crypto? And there's all these new categories that are always sprouting up and people always want the brand halo of either the biggest arena in the world, which is MSG or the Knicks and Rangers and stuff. So I just think they play so well over time. But gosh, the Dolans have just really bummed me out with a bunch of their decisions recently. And we talked about how bad the MSG and MSG deal is. So I know you're kind of with me there. No, I'm with you with the short term and the long term, just remember, they bought, when they own Cable Vision, they bought Madison Square Garden that owned the Knicks, the Rangers, the garden itself, and a whole other, and real estate and air rights for a few hundred million dollars. Now, you know, the Knicks alone worth value

to $5 billion. So take the long-term view, although I realize, you know, clients aren't so forgiving. But in the long term, they've created a lot of value. And the other thing to remember is they did sell to Altis at the right time. So they are sellers of assets. So I wouldn't I wouldn't give up on them, but it's been a frustrating ride recently. I'm with you. I'm with you. You know, it's one of those ones one day they're going to sell and the stock's going to go up 150% that day or something because the asset value is so clear undervalue. It's just a question of I wish that there were the rumors that that day was going to be like 2019 or 2020. I wonder if that day is two years from now.

or if it's 20 years from now and you and I, I'm going to have a lot more gray hairs on my head and we're going to say, it finally happened, but we way underperformed along the long way. The one thing to talk about it, to mention what that is, listen, and I'm guilty of that too.

I've been saying for years, sell the Nick, sell the Rangers, whatever, the right move has been to hold onto this and they've created value a lot more than just investing in the S&P 500 by just holding onto these assets and compounding tax-free. So he's done the right thing.

It's just doesn't feel that. You know, again, I agree with you, but the right move has been to hold on to the Knicks because the NBA has done great and that rising tide lifted all boats. But in many ways, the NICs have hindered the NBA because they're the premier franchise in the premier market. And for 20 years, they have been managed like a joke. They've been awful. I mean, more than half the teams make the playoffs in the NBA and the NICs have made the playoffs like, what, three times in 20 years with all the advantage of a big sports team has. Like, they have outperformed and it's been the right thing to hold on. But you know what would have been even better if they had been run

properly and, you know, winning titles and stuff, which a New York team kind of has the right to do more frequently than any other team. And they haven't done that. So it's just the Dolans, man, the Dolans. Yeah. I think that's, no, absolutely. But it's, you know, these are the situations we look at there. There's really not for everyone when you take a longer term view. And, you know, we also, you know, in a forgot 40 have, you know, we talk about it next time or whatnot. But, you know, some, you know, growthier names like Uber. So we're not like just a traditional value firm, you know, where we take kind of, you know, as I said, a business person's approach. So it's interesting. There's a lot of opportunity in January gave us a lot more

opportunity. That's true. That's true. Well, hey, John, we've been running for an hour, so I'm going to wrap it up there. For anyone who wants in the show notes, I'll have links to forgotten 40. John, if you'll send me the link to the Scotts America where I'll put that too so people can see kind of the numbers behind some of the parts and everything we've been talking about. But John, this was your third appearance and I'm already looking forward to the fourth. Thanks so much for coming on. me.