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The world's largest seed company, Monsanto (NYSE: MON) reported its third quarter's results two weeks ago in which its profit dropped by 3% as last year's drought had a negative impact on the growth of corn seeds and also increased production costs, which consequently offset the positives coming from the rise in herbicide prices.

The business operates mainly in two segments, Seed and Agriculture Productivity. The Seed segment, which forms the backbone of the company witnessed a drop in sales and income but a better performance by Agricultural Productivity, coupled with favourable taxes, made sure that Monsanto ended up beating the earnings estimate. But, Monsanto has strong fundamentals with growing international operations and is still far more profitable than its rivals.

Revenue Miss and Earnings Drop

Monsanto reported earnings of $909 million or $1.68 per share, falling from $937 million or $1.74 per share in the same quarter last year. However, the adjusted earnings rose by 1.8% year-over-year to $1.66 per share which was above Wall Street's consensus estimate of $1.61 per share. Analysts have identified that the company benefited from lower tax rates, which gave a $0.14 boost to earnings, which was the main reason behind the better than expected results. Its operating income, excluding taxes, has actually fallen by 8% to $1.22 billion.

Revenue remained flat showing an increase of just 0.7% to $4.25 billion from $4.22 billion in the corresponding quarter last year and was below analysts' estimate of $4.41 billion.

Last year's drought led to higher winter production, which is more expensive, and caused a 7% increase in costs. With less than 1% increase in sales and soaring costs, the gross profit margin dropped from 56% last year to 53.2% in the previous quarter.

Contrasting Segment-Wise Performance

Seed and Genomics is the core segment of Monsanto and contributes around 72% to the top line revenues. In the last quarter, the segment's revenues fell by 2.4% to $3.05 billion. The drop in revenues can be attributed to;

a) the royalties issues over soybeans in Brazil that led to decrease in collection of royalties from farmers and
b) the decrease in planted cotton acres.

This is shown in the table below. The 5.7% drop in Soybean Seed and Traits and the 21.4% drop in Cotton Seed and Traits caused an overall 2.4% drop in the segment's sales.

Seed and Genomics Segment

2012

(In Million)

2013

(In Million)

% Change

Corn Seed and Traits

$1,515

$1,559

2.9%

Soybean Seed and Traits

$698

$658

-5.7%

Cotton Seed and Traits

$490

$385

-21.4%

Vegetable Seeds

$195

$216

10.8%

All Other Crops Seeds and Traits

$230

$236

2.6%

Total Seeds and Genomics

$3,128

$3,054

-2.4%

The segment's earnings before interest and taxes (EBIT) fell significantly by 17.2% to $920 million which, in terms of earnings per share, were $0.24 short of market's expectations.

Sales in the smaller Agricultural Productivity segment rose 9.4% to $1.19 billion mainly due to the increase in prices of herbicides including the Roundup brand. Glyphosate, a product under the Roundup umbrella, has witnessed 42% increase in retail price in the last twelve months. Consequently, the segment's gross profit margin rose by more than 600 basis points from the same quarter last year to 37.4%. In terms of earnings per share, unlike Seeds and Genomics, Agricultural Productivity's income was $0.11 more than analyst's expectations.

Agricultural Productivity Segment

2012

(In Million)

2013

(In Million)

% Change

Revenue

$1,091

$1,194

9.4%

Gross Profit

$342

$447

30.7%

Still Strong?

Monsanto is responsible for more than 90% of the U.S soybean production and is the global leader when it comes to genetically engineered crops. As mentioned earlier, Monsanto's gross profit margin fell to 53.2% but due to its powerful brand and valuable patents, it is still considerably more profitable than some of its competitors such as DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW). In the last two years, DuPont's margin has remained between 20% and 32.5% while Dow Chemical's margin has been in the range of 11% to 19%. On the other hand, Monsanto has averaged 50.5% in the corresponding period.

Monsanto also has solid fundamentals with low debt levels. The company's debt-to-equity ratio is just 15.79, considerably better than DuPont's 107.88 and Dow Chemical's 90.74. Monsanto has been able to generate a healthy return on equity of 19.23%, which is just behind DuPont's 21.73% but well ahead of Dow Chemical's 5.35%.

However, Monsanto has disappointed on the earnings front. In the previous quarter, it reported a sequential and a year-over-year drop in profits. Moreover, had it not been for lower taxes, it would have missed Wall Street's earnings estimates by $0.09 per share.

For the current fiscal year, Monsanto believes that it will increase its adjusted earnings by 19.4% to 20.7%, which is below market's growth expectations of 21.5%. Although 20% earnings growth would be a decent performance by most measures but it shows a drop from the 27.4% growth it recorded last year and 49.5% growth the year before.

Performance Summary

Monsanto's stock has risen by 9% this year, ahead of Dow Chemical which is up 6.9% and behind Dupont which is up 20.6%. The S&P 500 ETF (AMEX:SPY) has risen by 17.9% in the same period.

Monsanto board has also recently decided to return some of its cash to the shareholders through a $2 billion buyback program.

It has strong fundamentals while its global corn and the U.S seed business will ensure that the company meets the analysts' earnings estimates. I believe that despite its weaknesses, Monsanto can be a good long-term investment.

The markets have high expectations from Monsanto and its stock is currently trading 22 times its current full-year earnings estimates as opposed to DuPont and Dow who are trading 14 times their current annual EPS estimate. Monsanto is clearly more expensive but several analysts, including TheStreet and Topeka Capital Markets have given it a 'buy' rating at the current price levels. Besides, these, according to data compiled by MarketWatch, a total of 16 out of 23 analysts have given Monsanto a 'buy.'

Data Source: Reference links included. All other data has been taken from Yahoo! Finance, Google Finance and YCharts.

Source: Monsanto: The Agriculture Behemoth Is Still Attractive Despite Revenue Miss