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Shares of Monsanto (MON) ended Wednesday's trading session with modest gains of 0.5%, while the wider equity markets were trading with losses of around 1%. Before the market open, the provider of seeds, biotechnology trait products and herbicides, announced its second quarter results for its fiscal 2013. Farmers across the world were using Monsanto's products to boost crop yields in a period of high agricultural commodity prices.

Second Quarter Results

Monsanto generated second quarter revenues for its fiscal year of 2013 of $5.47 billion, up 15% on the year before. Growth was driven by a 16.5% increase in the corn seed and traits division, which makes up 60% of total revenues. Noticeable as well was the 37% revenue growth in the agricultural productivity division, driven by strong sales of Roundup. Total revenues came in ahead of consensus estimates of $5.27 billion.

As a result of positive sales leverage and tight expense management, Monsanto increased its earnings by 22% to $1.48 billion, or $2.73 per diluted share. Earnings comfortably beat consensus estimates of $2.55 per share. Despite the strong sales results -- selling, general and administrative expenses rose a mere 10%, while the Research & Development budget rose by just 2%.

Chairman and CEO Hugh Grant commented on the performance during the quarter:

"Our performance underscores our expectations for a third consecutive year of strong earnings growth and reinforces our opportunities for the future as well."

Outlook

Based on the decent performance during the quarter, Monsanto is raising its full year guidance. Monsanto now anticipates full year earnings per share to come in between $4.42 and $4.52 per share.

Given the significant earnings beat in the second quarter, the increased guidance is a little disappointing. Analysts were looking for Monsanto to guide for full year earnings of $4.56 per share.

Monsanto maintains its free cash flow guidance of $1.8 to $2.0 billion.

Valuation

Monsanto ended its second quarter with $4.75 billion in cash, equivalents and short term investments. The company operates with $2.20 billion in short and long term debt, for a net cash position of approximately $2.5 billion.

For the first six months of the year, Monsanto generated revenues of $8.41 billion on which the company net earned $1.82 billion, or $3.37 per diluted share. The company is on track to generate annual revenues of $15-$16 billion, on which it expects to earn between $2.4 and $2.5 billion.

The market currently values Monsanto at around $56 billion. This values operating assets around $53.5 billion. This values operating assets at roughly 3.5 times 2013's expected annual revenues and around 21-22 times annual earnings.

Monsanto currently pays a quarterly dividend of $0.38 per share, for an annual dividend yield of 1.4%.

Some Historical Perspective

Long-term holders in Monsanto have seen great returns as shares rose from just $10 in 2003 to current levels just above $100 per share. Shares peaked at $140 in 2008 and fell back to $50 in 2010 as agricultural commodities fell as a result of the recession. As the economy recovered and profit growth accelerated, shares have doubled again over the past three years.

Between 2009 and 2013, the company is expected to grow annual revenues by roughly a third from $11.7 billion to $15-$16 billion in 2013. Earnings grew some 20% from $2.1 billion to an expected $2.4-$2.5 billion.

Investment Thesis

Monsanto reported some decent second quarter results. Investors took notice, as the "planting" season is crucial for the full year results. Monsanto traditionally generates the majority of its earnings during this quarter. Based on today's guidance, second quarter earnings will make up roughly 60% of the expected full year earnings for 2013.

High corn prices push farmers to look for ways to improve the yield on their crops. As such the incremental revenue from crops warrants the usage of Monsanto's products which are expensive, but do result in better crop yields.

The company's agricultural productivity business showed a strong performance. Despite increased innovation, sales of the pesticide product Roundup were very robust. More important is the continued innovation and yield enhancement performances of the seeds, which performed really well in Brazil.

The company predicts record corn volumes for the year, driving sales in the Seeds and Genomics business. The strong attributes of the seeds also catch on in new agricultural countries like Argentina and Brazil. Monsanto's genetically engineered products results in higher yields and a better resistance to diseases and weed, thereby boosting harvesting yields.

Monsanto's shares have benefited from a range of factors in recent years. This includes higher agricultural commodity prices, incredibly strong pricing power, an increase in demand for food, and a less volatile business performance. The profits from the more stable agricultural productivity business shielded investors to some of the volatility of the seeds business. Today, the business prospects continue to look good as the company again raised its full year forecast.

With all these positive factors and a valuation at over 20 times earnings, shareholders have already priced in all the good news. While the long-term prospects remain undoubtedly good, there are few triggers for short, to medium term outperformance.

I remain on the sidelines, based on a valuation call.

Source: Monsanto - Strong Positive External Environment Sends Shares To 5-Year Highs