Monsanto's Q3 Reveals Rich PE, But Expect Little Downside for the Stock

Agricultural chemical concern Monsanto (MON) announced earnings for May's 3rd quarter of 1.25, versus Street expectations of 1.17. Revenues came in at $3.16 billion, well under the expected $3.45 billion. The market won't be too excited about this "beat," as it comes after the company already reduced its earnings guidance on weak Roundup sales.

The earnings release alone is cause for immediate concern, in which the company announces "New Competitive Dynamics Change Outlook for Roundup Franchise."

In Monsanto's May release, the company stated that Roundup sales weakness was largely "weather-related," yet it now acknowledges what may look like a permanent "trade-down" to generic competitors. MON is creating a separate Roundup division to better align costs and focus on the product.

• Roundup issues aside, the Seeds and Genomics division (71% of revenue), was up 10% year over year, helping to offset the disastrous 47% decline in Roundup sales.
• Gross profit during the quarter actually improved to 58% of sales from 56% in the year ago quarter.
• Selling and General Expenses drop to 16% of revenue from 17%
• Research & Development costs up to 9% of revenue, from 7%
• Pretax income 32% versus 31% last year.

Monsanto breaks results down into two segments - the seed division and the "productivity" division, the latter of which involves products like Roundup that protect and help the crops.

The seeds division had remarkable improvements year-over-year. While sales were up 10%, its EBIT (earnings before interest and taxes) was up 37%. EBIT margin as a % of sales improved a whopping 7% year over year, and the division's contribution to total company EBIT improved from 53% to 80% - awesome performance.

The agricultural productivity segment had a dismal time, with Roundup sales down 47%. Divisional EBIT dropped to $211m from $501m, and the division now chipped in just 20% of the companywide EBIT.

Monsanto guided full year earnings to the low end of previous guidance, equating to about 4.40 per share - right in line with the Street consensus. That's a PE of 19 based on MON stock trading up to 81.5 right now. Granted the company is a great operator, but that's a rich PE, especially while one division is in turmoil and the other is putting up numbers that will be very tough to replicate. The balance sheet is pristine though, so I don't expect much downside for Monsanto.

Comments

[Mad Hedge F...:]

The world population has doubled from 3.5 to 7 billion since then, eating up surpluses, and is expected to rise to 9 billion by 2050. Now we are running out of water in key areas like the American West and Northern India, droughts are hitting Africa and China, soil is exhausted, and global warming is shriveling yields. Water supplies are so polluted with toxic pesticide residues that rural cancer rates are soaring. Food reserves are now at 20 year lows. Rising emerging market standards of living are consuming more and better food, with Chinese pork production rising 45% from 1993 to 2005. The problem is that meat is an incredibly inefficient calorie transmission mechanism, creating demand for five times more grain than just eating the grain alone. I won’t even mention the strain the politically inspired ethanol and biofuel programs have placed on the system. It is possible that genetic engineering, sustainable farming, and smart irrigation could lead to a second green revolution, but the burden is on scientists to deliver. The net net of all of this is that food prices are going up, a lot. Entertain core long positions in corn, wheat, and soybeans on the next dip, as well as the second derivative plays like Agrium (TO), Potash (POT) and Monsanto (MON). You might also look at DB Commodities Tracking Index Fund (DBC). These will all surpass last year’s stratospheric highs at some point.

Jun 25 08:56 AM