Valuation ratios are critical as they are tools investors (MOO) use to determine the price they should pay for stock. The PE (price-to-earnings) ratio is often used by investors to determine the value of an investment in companies such as The Scotts Miracle-Gro Company (SMG), Central Garden & Pet (CENT), The Home Depot (HD), and Lowe’s (LOW).
PE and stock trend
Above, we’ve plotted the PE ratio against SMG’s stock price movement, indexed to 100 in January 2001. We’ve used the forward PE ratio, which is calculated using the current price over Wall Street analysts’ estimates for SMG’s earnings over the next 12 months. The company’s stock price movement is strongly related to that of the PE ratio. The valuation ratio took a dive in 2008 following the financial crisis but has since recovered. Since 2010, the PE ratio has gradually risen and appears to be trading at its highest level yet.
Currently, SMG is trading at a forward PE ratio of 21.6x, which fell after reaching a high of 23.3x in November 2016. The PE ratio can rise when a company’s growth prospects appear more positive and analysts revise their earnings estimates upwards. The gradual rise in Scotts’s PE ratio implies that the market is anticipating the company’s future earnings to rise.
While not much has changed in regards to people’s gardening and lawn preferences, there are some explanations for the higher PE ratio. In recent years, the United States has legalized marijuana in a few states for recreational and medicinal purposes. Investors and analysts see this a catalyst for Scotts’s products. The company has also recently forayed into indoor urban gardening through hydroponics, which may spark investors’ interest.