Monsanto's (MON) recent quarterly (Q1/2013) results showed the seed giant earning some $340 million - $0.62 per share - well above the Wall Street consensus of $0.37. The seed giant was up over 4% on the news. Monsanto even boosted its outlook and has its full year EPS at $4.40 -- compared to a previous guidance of $4.32, but still below Wall Street's estimate of $4.43. The prior quarter (Q4/2012) results showed weak financial results on a loss per share of $0.44. Despite the weak quarter, fiscal year 2012 showed positive growth - full year earnings at $3.70 versus 2011 at $2.96.
Monsanto's two major segments include seeds and agricultural productivity. Seeds make up around 75% of revenues and include seeds for corn, soybeans and cotton. The agricultural productivity business is around 25% and includes various herbicides. It has an impressive biotechnology research platform. The seed company has increased its research and development spending by over 30% the last five years. Its recent technology includes seeking products for higher yields for farmers. In order to minimize risks of weather uncertainty, Monsanto produces seeds at multiple locations under irrigated conditions.
Competition. E. I. du Pont de Nemours and Company (DD) manufactures and produces seed, The Scotts Miracle-Gro Company (SMG) manufacturers and markets lawn and gardens products and Archer Daniels Midland Company (ADM) processes corn, wheat, other agricultural seeds. Monsanto is also a leader on a profitability basis: EBITDA margin of 28%, whereas Archer is at only 3%, Scotts' 11% and DuPont's 18%.
Industry drivers. The agricultural industry is showing positive trends. Deere & Company (DE) - the agriculture and farm equipment maker - expects to see sales up 6% and earnings up 9% in fiscal year 2013 (ending Oct.). The USDA forecasts show corn inventories and farm income that are supportive of higher grain prices and fertilizer consumption. The seed industry is maturing in the U.S. with the planted acres plateauing. The crop market sees the most demand from corn - where acres of corn was up 5% in 2012. Total planted acres in the U.S. should stay somewhat unchanged, but what should help Monsanto is increasing revenues due to switching to its seeds to increase efficiency.
Growth. Longer-term growth will come from Asia and Latin America, thanks to rising populations and income levels. The agricultural company also expects to see better penetration in South America, with expansion of availability of both its corn and soybean seed technologies. One of the biggest inputs for seed and agricultural production is natural gas, which has seen prices well below historical average. These revenue driver and cost factors should help with multiples expansion and return the stock to its historical levels.
With free cash flow estimates of $2 billion - it puts cash flow per share at $3.75, compared to annual dividend payments of $1.52. The dividend payout is only 40% of free cash flow and 35% on estimated earnings. Monsanto has a price-to-earnings ratio of 20, but its 5-year average price-to-earnings comes in at 27.5. Over the last five years, the company shares have traded in the range of 15 to 50 on a price-to-earnings basis. Based on 2013 earnings estimates and its long-term historical P/E Monsanto could trade upwards of 25% higher from current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.