Monsanto - Soft Earnings And Outlook, But A Stellar Acquisition

| About: Monsanto Company (MON)

Shares of Monsanto (MON) witnessed a modest correction after the provider of agricultural products for farmers reported its fourth-quarter results before the market open on Wednesday.

As the company moves along just fine and announced a really good strategic acquisition, I am quite optimistic about the very long-term prospects of the company. I am hoping for a nice pullback to levels below $100 per share, to possibly pick up some shares.

Fourth-Quarter Results

Monsanto generated fourth-quarter revenues of $2.20 billion, up 5.0% on the year before, but falling short of consensus estimates, which stood at $2.3 billion.

Note that the fourth quarter is traditionally a weak quarter for the company. Monsanto reported a net loss of $249 million for the quarter, up from losses of $229 million in the comparable period last year.

As such GAAP losses rose from $0.42 to $0.47 per share. Consensus estimates for fourth-quarter losses stood at $04.3 per share.

CEO and Chairman Hugh Grant commented on the performance during the final quarter, "The strength of our broad global portfolio enabled us to deliver a third consecutive year of strong business results, and by building off our proven strategy we're confident the key elements are in place to carry that momentum through to achieve strong business growth in 2014."

Looking Into The results

Total sales of seeds and genomics fell by 1.5% to $1.18 billion, as sales of the different traits and seeds saw a large divergence. Sales of cotton seeds more than doubled to $65 million, while soybean seed sales fell by 39% to $87 million.

Agricultural productivity sales rose by 13.6% to $1.02 billion, being the major boost behind sales growth.

Despite the revenue growth, gross margins came in unchanged at 42.0% of total revenues. At the same time, operating expenses rose by roughly 90 basis points to 55.1% of total revenues, resulting in higher operating losses.

Note that this is not too worrisome as the fourth quarter typically sees a lot of seasonal weakness.

The Acquisition Of Climate Corporation

Besides announcing the fourth-quarter results, Monsanto furthermore announced the acquisition of The Climate Corporation.

Monsanto will pay $930 million in cash for the agricultural analytics and risk management firm. Combined, the firms should be able to further improve farmer's productivity. The company was founded as recently as 2006 by scientists formerly employed by Google (NASDAQ:GOOG) and other Silicon Valley companies.

The very cool deal is expected to close in the coming quarter.


Monsanto expects strong growth from the core business in the fiscal year of 2014. EBITDA is expected to grow in the mid-to-high teens, boosted by margin expansion and revenue growth.

Full year GAAP earnings are seen between $5.00 and $5.20 per share, inclusive the $0.14 per share dilution from the acquisition of The Climate Corporation.

Consensus estimates for 2014 earnings ranged from $5.30 to $5.34 per share, depending on which news agency you are looking at. Even when factoring in the expected dilution from The Climate Corporation, the earnings guidance seems a bit soft.


Monsanto ended its fiscal 2013 with $3.9 billion in cash, equivalents and short-term investments. Total debt stands at $2.1 billion, for a solid $1.8 billion net cash position.

Full-year revenues for 2013 totaled $14.86 billion, up 10.0% on the year before. Net income attributable to Monsanto's shareholders rose by 21.4% to $2.48 billion.

With shares trading around $103 per share, the market values Monsanto at some $55 billion, or its operating assets around $53 billion. This values operating assets of the firm at 3.6 times annual revenues and 21 times annual earnings.

Monsanto currently pays a quarterly dividend of $0.43 per share, for an annual dividend yield of 1.7%.

Some Historical Perspective

While Monsanto is a heavily criticized company, especially among environmentalists and some farmers, shareholders have few reasons to complain. Shares steadily rose from $15 in 2004 to highs of $140 in 2008. The stock witnessed a correction towards $50 per share in 2010, but recovered to current levels around $100 per share.

Between fiscal 2009 and 2013, Monsanto increased its annual revenues by a cumulative 27% to $14.9 billion. Net earnings rose by roughly a quarter as well to $2.5 billion.

Investment Thesis

Investors and analysts have some information to factor in following the earnings report. Fourth-quarter earnings and the full-year guidance into 2014 were a bit soft. At the same time, the company made a great acquisition in my opinion. The deal is even called a "transformational" growth engine, by Monsanto's executives.

The acquisition of The Climate Corporation addresses a multi-billion dollar future market, and the activities will be integrated with Monsanto's relatively new Integrated Farming Systems business.

I think this is a case when projections and consensus estimates were too high, as I happen to think the outlook is solid given the poor price performance of Corn over the past year, leading to reduced planting next year. Solid expansion in Brazil and Argentina, as well as higher prices for Roundup will keep on adding to 2014's earnings.

I like the mixture of the business. Monsanto is moving from just planting seeds towards more data, as I think Monsanto could become an even greater powerhouse following the successful integration and build out of the Climate Company platform. This should benefit the planet and its farmers, as society can produce more with fewer resources and land.

While better productivity seems bad for Monsanto at first sight, the company has been able to report record performance again by boosting the product mix, volumes and pricing power. So investors should not be too worried about the little softer guidance, and the tiny dilution of merely $0.14 per share following the deal.

Back in April of this year, I last took a look at Monsanto's prospects. I concluded that a strong positive external environment would send shares to levels last seen about five years ago.

At the time Monsanto reported its second-quarter earnings, which showed good conditions for the business to operate in. I concluded that at 20 times earnings, investors have already priced in all the good news, resulting in few triggers for short- to medium-term outperformance.

Essentially shares are unmoved from that point in time. I reiterate my stance that the valuation is full, but would be glad to see a renewed buying opportunity in the mid-90s, last witnessed in August.

The long-term prospects remain really good, while the very smart acquisition of Climate Company, if managed and integrated well, could be really exciting for the company in the long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.