Earlier in this series, we discussed The Scotts Miracle-Gro Company’s (SMG) forward PE (price-to-earnings) ratio over a 16-year period. We saw that the company has been recently trading at a PE ratio of 21x, which is a 16-year high. Although the PE ratio is a tool for relative valuation, bear in mind that there are no perfectly comparable companies.
Comparing with peers
The peers in the chart above are currently trading at a median forward PE of 19x. The Home Depot (HD), which is one of Scotts’s major customers, is trading at a multiple of 19x. Lowes (LOW), which also sells Scotts’s products, is trading at a multiple of 16x.
Spectrum Brands (SPB), which caters to the same market as Scotts Miracle-Gro, is trading at 20x. Agrium (AGU), which has a large retail network of fertilizers (MXI) in the United States, is trading at 18.7x.
We compare Scotts Miracle-Gro’s PE ratio with other companies’ because of a belief in the law of one price, which states that similar assets should trade at a similar price. The lower the PE ratio, the better, because it is what you would pay for one unit of earnings in a company. Next, we’ll discuss how the company’s stock has trended with analysts’ ratings over the years.