Analyst Downgrades Scotts, Cuts Targets on Hydrofarm, GrowGen - Grow Life 420

Analyst Downgrades Scotts, Cuts Targets on Hydrofarm, GrowGen

June 22, 2022

#KahliBuds #MMJ #CBD #THC

When Scotts Miracle-Gro (NYSE: SMG) first began telling shareholders that its hydroponic subsidiary Hawthorne was slowing in sales, it seemed like a temporary situation. That might not be the case. A new in-depth report by Wells Fargo analyst Chris Carey based on survey data collected by Cannabiz Media is depressing, to say the least. Reality bites.

Carey’s response to the study has promoted him to downgrade shares of Scotts to Equal Weight and roping his price target to $85 (from $115). The stock was lately selling at $75. He also cut his price targets on Hydrofarm (NASDAQ: HYFM) to $4 from $7 and GrowGeneration (NASDAQ: GRWG) to $3.50 from $4.00.

The report reached out to thousands of growers to ultimately develop a list of ~500 licensed cannabis cultivators responding across 6 states, via online surveys and hours of phone conversations. The study found that “Overall, 62% of cultivators feel “bad” or “terrible” about their current markets vs only 8% that feel “good” or “great”. When asked “what is going well for your business today?” ~20% responded with the equivalent of “nothing.” California was by far the state with the lowest sentiment with 70% of cultivators feeling “terrible” about the market, 16% feeling “bad” and only 5% ‘good’ or ‘great’.” The critical point here is that California has the worst outlook and it accounts for almost a third of the overall cannabis market. 

While other hydroponic companies have stated in earnings releases that they believed the landscape would improve by the end of the year, this report suggests otherwise. “Most growers we surveyed are not expecting things to improve in the near term, with only 14% expecting improvement in 6 months or less. Interestingly, 46% of respondents don’t know when things might improve underscoring the lack of visibility that has plagued the industry. While some capacity exiting is one of the few bright spots for the industry, we would likely need to see a higher level of exits or reduction in production to become more constructive.” When almost half of the growers say they have no idea when their market will improve, it’s not only a bad sign for farmers but the entire industry.

Stress Points

The survey uncovered the issues causing the stress at the beginning of the cannabis food chain. Declining wholesale prices led the way, followed by burdensome compliance requirements, taxes, illicit market competition and lack of distribution. Small growers can’t compete with the cost efficiencies of corporate cannabis and as the prices fall for their products, they are losing money. One grower told the group that they thought they’d sell cannabis anywhere between $1800 and $2200 a pound, but instead it’s going for $400 a pound. A California cultivator said he was selling cannabis at $200 a pound and paying $150 a pound in taxes. 

The survey on prices found that 60% said they were selling cannabis for under $750 a pound. 14% were selling between $751 and $1250, 18% were selling a pound between $1251 and $1500, and the rest (9%) were above $1500. They say they aren’t hitting the cost of production and many are considering selling their licenses or just giving up. 

The respondents seemed mixed on the effects of the illicit market. Some cited it as a major problem with these players flooding the market, while others didn’t think it was as big an issue as the regulatory requirements. Compliance requirements were a major stumbling block with one growing mentioning METRC as a challenge to deal with.

Plowing Ahead

The really sad part of the report was all the comments of cultivators wanting out. With little positive outlook and no idea when things will get better, many expressed the desire to just give up.  37% said that they have thought about leaving the industry but haven’t taken any steps to exit yet. Some are continuing to keep plowing ahead. The report said, “Cultivators indicated intentions to purchase soil (61%) and nutrients (73%) next 6 months, but just 32% have plans to buy lighting.” Only 18% of respondents described plans to decrease cultivation in the next 12 months compared to 35% planning to increase. 

However, in a standard investor philosophy, a correction can ultimately be a good thing. If lots of cultivators leave the industry, that will eventually lead to less supply and higher prices. Yet, a correction like this would take a long time to trickle down, and in the meantime, there is little positive to point to.

The post Analyst Downgrades Scotts, Cuts Targets on Hydrofarm, GrowGen appeared first on Green Market Report.



420GrowLife

via www.KahliBuds.com

Debra Borchardt, KahliBuds, 420GrowLife

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