Seeking Alpha
Long/short equity, value, research analyst, commodities
Profile| Send Message|
( followers)  

By G C Mays,

On June 27th, Monsanto (NYSE:MON) will report earnings for the 3rd Quarter of their 2012 fiscal year and it has already provided us with improved guidance for the current quarter and year. Through June 22nd the stock is up 12 percent year to date versus 6.2 percent for the S&P 500. At a recent price of $78.45, the stock is already trading at roughly 22 times trailing twelve month earnings of $3.53 per share.

Strong selling seasons in the northern and southern hemispheres contributed greatly to increased earnings estimates for the quarter and year. The second crop season in Brazil was stronger than expected as increased corn acres were higher than anticipated. As I noted in a recent article :

Brazil raised their production estimates for the 2011/12 marketing year to a record 69 million metric tons as ideal weather for second crop corn added an extra 2 million bushels.

Farmers planted most of the second crop in Brazil's Central West region, where corn is typically planted in January; the dry season usually starts in May. However, the rainy season lasted until early June and provided another 4 - 6 inches of rain and this increased corn yields

In the northern hemisphere, increased corn acres had a huge positive influence on sales. Monsanto's corn seed & traits business has generated roughly 40 percent of the company's seed and genomics revenues on average over the last 3 fiscal years and 68 percent of sales in the first 6 months of the current fiscal year versus 66 percent over the same period a year ago. The company saw increased acreage in its core corn business in Eastern Europe that also contributed to better than expected performance.

(click to enlarge)Monsanto Seeds and Genomics Revenues by Category - FY2012 Year to DateSource: The Mays Report

The vegetable seeds business is the only division in the seed & genomics operating segment where revenues are down year-to-date. The reasons for the sales decline are the continuing problems in Europe as well as an inventory write-down.

The company has raised earnings guidance for its fiscal 2012 to a range of $3.73 - $3.78 per share on a GAAP basis. With the increased earnings guidance and a 5-year earnings growth rate of about 19.5 percent a bull case could be made for the stock despite a leading PE of 21. When earnings are formally announced on Wednesday the stock could push towards its 52 week high of $83.94 a share. However, as I wrote in my Q2 analysis entitled, "Monsanto Q2 Earnings In Full Bloom - What's Wrong With The Stock?", I think the stock may already be fairly valued or perhaps even overvalued.

Source: Monsanto Q3 Earnings Preview: Stock Price May Already Reflect Earnings