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Summary

  • Demand for organic produce (AERO's wheelhouse) continue to be on the rise.
  • AERO's December-quarter revenues increased 67% to $5 million. Sales to retailers were up a whopping 289%.
  • AERO's highest-priced product has been backlogged (primarily due to high demand) since before its last earnings call, boding well for March quarter results.

Over the past several months we have been providing research regarding AeroGrow (OTCQB:AERO) to subscribers of our PTT Newsletter. This article will provide a comprehensive recap of our AERO research since our initial coverage launch on January 30.

For starters, on February 6, we reported that we had fired up a new AeroGarden on January 30, the day we issued our initiation report. Here's what we had to say:

So far, it has been "beating expectations". We have Basil, Chives, and Parsley (no, none of those are code words for marijuana). The basil is supposed to take 6-12 days to sprout. It took just 4. The chives are supposed to require 8-21 days, but we got a sighting after 5. The parsley is also an 8-21 day proposition. For that one, we're at 7 days and counting.

Overall, it's been a fun and easy experience. The light turns itself on and off. Since setting it up, I don't think we've touched it. If only our SodaStream machine was as proactive. Alas, the SodaStream is in a new home - we donated it to charity :^)

Here's a photo of our proud basil at 5 days:

That day, we also encountered fresh Nielsen data, showing that demand for natural/organic foods accelerated 30bps over the prior quarter:

(click to enlarge)

Source: UBS Securities

Update: Subsequent to that, on April 10, Wal-Mart (WMT) reported that it will "expand its organic grocery category by adding a new brand, Wild Oats". The move is meant to help revive Wal-Mart's grocery business. This, and the Nielsen data point provided new evidence that the organic trend continues moving up and to the right, consistent with our original AERO thesis.

Earnings

On February 13, AERO reported blowout Q4 results. December-quarter revenues increased 67% to $5 million. Sales to retailers were up a whopping 289%. With these strong holiday results, AERO's quarterly operating profit jumped to $371,000 from a loss in the prior year. Net income was $302,000, as compared to the $297,000 loss a year earlier.

Basically, the numbers and the earnings call were both outstanding. To me, revenue in the retail channel was the big thing to listen for…and they did not disappoint. Almost half of their revenue came from retail, even as direct (Internet) sales (their traditional stronghold) rebounded to post 8% growth.

Confirming what I predicted in my initiation piece, AERO discussed their successful partnerships with Amazon.com (NASDAQ:AMZN) and Scotts Miracle-Grow (NYSE:SMG). They also discussed expansion opportunities in Home Depot (NYSE:HD) and Costco (NASDAQ:COST). In fact, they already plan to borrow $2-4 million to help fund inventory expansion for the next holiday season. Clearly, they see a long road of growth ahead.

The only blemish was that sales through QVC were disappointing. Seriously, that was the worst news they had to offer (completely insignificant in my book).

If you haven't already, I recommend buying an AeroGarden at their web site. You'll get to see how great it works for yourself. Ours continues to do exceedingly well. It pretty much takes care of itself. Best of all, everything has sprouted ahead of schedule and looks great. Here's an updated photo to compare to our prior week's picture:

(click to enlarge)

On February 20, we commented on news from the New York Times (and other media outlets) that the U.S. government took yet another step towards endorsing the legalization of marijuana in America.

Specifically, "The Obama administration…issued guidelines intended to give banks confidence that they will not be punished if they provide services to legitimate marijuana businesses in states that have legalized the medical or recreational use of the drug, even though it remains illicit under federal law".

In my estimation, this accomplished two goals:

  1. It removes a roadblock to enabling the "marijuana experiment" to move along without any unintended impediments. I believe the feds want to see how legalization impacts society (crime, productivity, etc.) in small pockets (like Colorado) before allowing it to become nationally accepted.
  2. The guidelines will enable the government to monitor cash and revenue movement, thus gaining a fuller understanding of the potential rewards (tax revenue) that can be reaped from widespread legalization.

Net-net, this is a positive development for any vendor who eventually stands to benefit from legalization, including AERO. That being said, investors shouldn't expect the company to specifically target this opportunity until they feel that the time is right.

In other news, that week shares of Medbox (OTCQB:MDBX) came under pressure after Citron Research issued a report questioning the company's accounting practices. I had no comment specific regarding the allegations. However, I said the following:

"This event reinforces what I've said from the beginning:

  1. Established companies like AERO, Scotts, and others appear (to me) to be the best-positioned and most legitimate way to play the marijuana trend. The only reason they aren't already involved is that 1) marijuana remains illegal according to Federal law and 2) being associated with marijuana may not yet be politically correct (in other words, it may hurt the reputation of established companies, so they are taking a wait-n-see approach). Once larger and established companies enter the market, I expect most of the upstarts to get trampled underfoot.
  2. Considering what I just stated, investors should be astounded when they see GrowLife (OTC:PHOT) and MDBX command a $400+ million market cap. AERO sits at just over $40 million! One way or the other, the math simply doesn't add up. All we can do is trust our Methodology to provide the proper guidance. I'll leave the rest to you.

In the meantime, the official PTT AeroGarden continues to make great and fun progress. This week, each of the three caps came off and things are starting to grow at a faster pace."

I provided our day-20 photo:

(click to enlarge)

As you can see, the 8-21 day sprouting period was more than accurate. Everything sprouted early and was doing quite well after just 20 days. Fun stuff! I highly recommend purchasing one for yourself (and/or kids). This is a critical aspect of consumer-product due diligence…and will contribute to the company's quarterly results. Win-win!

CNBC Turns It Up A Notch

On February 26, CNBC aired its latest marijuana documentary, "Marijuana in America - Colorado Pot Rush". It was a pretty good overview of what was happening in Colorado. I would recommend watching it to gain perspective on where this might be going (nationwide).

That being said, there weren't any Earth-shattering revelations for us, because we had a PTT representative in Colorado for the legalization "event" in January. However, a few things really stood out, as I reported at the time:

  1. Triangulating the facts and figures provided in the documentary, I calculate that legalized marijuana likely represents a $30 billion annual opportunity for the U.S. The taxation implications are incredible. In Colorado, the sales tax on recreational marijuana is an eye-popping 36% (it's much lower for medicinal sales).

    Simultaneously, legalization could put a big dent in criminal activity, as it did when alcohol was legalized. Personally, I strongly believe that the federal government is monitoring Colorado for the potential negatives (addiction, child usage, etc). In the end, if the negatives can be mitigated, you can bet that marijuana will be legal across the country before long.

  2. Marijuana stores have to grow their own marijuana. Our research has also revealed that state laws are limiting how much square-footage can be allocated to growing marijuana. Both of these factors could be significantly positive for AERO. AERO's hydroponic technologically was specifically designed to maximize growing output and minimize effort. I saw a lot of potted plants in CNBC's documentary. In my opinion, they could eventually be replaced by specially-engineered "AeroFarms" (not to be confused with any of the products in AERO's current catalog).

I also stated:

"Once again, it's important to note that AERO is officially not attacking the marijuana opportunity at this time. However, it's also important to stay abreast of the opportunity in the event that AERO's party line changes.

Sticking to AERO's official uses, our first month with the AeroGarden was great. Everything was growing so fast that we were clipping fresh herbs on a near-daily basis. My first order of business was to put some fresh basil on a pizza (it was delicious).

Not to be outdone, Jamie (our resident Fashion &Trends analyst) made an omelet using fresh AeroGarden parsley, basil, and chives. I usually sprinkle salt on my eggs, but this time I didn't need to -- the natural flavor was outstanding."

(click to enlarge)

Without a doubt, February and March were exciting months for AeroGrow.

For investors, things got a little too exciting. Its 5-week ascent from our initiation price of $4.10 to a 52-week high of $10.45 countered the teachings of our Risk/Reward Methodology (which is considered required reading for all PTT Research followers). It was simply too much too soon, so we responsibly informed PTT Newsletter members that we were changing AERO's classification to "Wait Time".

The shares have since pulled back to a more attractive level, near its 200-day moving average. Despite the wild ride, our selection remains 25% above our initiation price, greatly outperforming the Russell 2000, which has declined by approximately 4% over the same timeframe.

(click to enlarge)

While our official rating remains "Wait Time", a strong Q1 may be all it takes for us to upgrade AERO to "Gold Mine". The chances are good. In Q4, they sold out of several models (including their new - and most expensive - model, the AeroGarden EXTRA LED) spilling demand over into Q1. Indeed, the AeroGarden EXTRA LED remains on remains backlogged through "approximately the week of May 26".

I have confirmed that demand (along with conservative inventory management) has been the primary driver of this backlog (as opposed to a component shortage). This confirms the backlog to be a positive data point, suggesting that Q1 was indeed fruitful. We'll find out when the company reports its fiscal year-end results (likely sometime in June).

Source: The Growing Opportunity For AeroGrow

Additional disclosure: Aspects of this report originally appeared in the PTT Insider newsletter for May 9, 2014. Mr. Gomes' investment Methodology serves as the basis of his selection process, asset allocation, and trading decisions. Investors who seek to act on his research should first read his Methodology and Portfolio Tracker. Both pieces, (as well as subscriptions to the PTT Insider) are freely available to the public at PoisedToTriple.com.