Monsanto: Poor Quality Earnings Beat Provides No Fertile Grounds For Stock To Move Up

| About: Monsanto Company (MON)
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Manufacturer of agricultural products Monsanto (MON) reported a second quarter report which beat analyst expectations and prompted the company in raising its full year forecasts.

Second quarter results

Net income rose 19% to $1.21 billion or $2.24 per share, up from $1.88 last year. Net income beat the consensus among analysts who expected earnings to come in at $2.08 per share. Revenues rose 15% to $4.75 billion. CEO Hugh Grant (not the actor) continues to expect to gain market share in US corn products. Results for the second quarter are particularly strong as the warm weather early this year has pushed deliveries forward in time.


Monsanto raised its full year fiscal 2012 outlook by 10 cents to $3.49-$3.54, which is not that ambitious given that the company just beaten analyst consensus by $0.16 per share for the second quarter. Factoring in the half year profit of $2.48 per share, the revised guidance implies practically flat earnings growth compared to last year's second half earning of $1.07, according to CFO Courduroux.

The lack of positive reaction to Wednesday's report is attributable to a very conservative guidance raise, which might imply that earnings for the second half of the year are flat or slightly lower. While the headline figures appear strong, the "quality" of earnings for the second quarter is lower as warm weather pushed deliveries forward in time, notably for corn products.


At Wednesday's closing price the market values the company at some $43 billion. Monsanto holds some $3.5 billion in cash with $1.5 billion in debt for a net cash position of $2 billion. Operating assets valued at $41 billion indicate the company trades at a 3.5 times revenue multiple and 25 times 2011's earnings.

For the first half its fiscal 2012 the company reported $7.2 billion in net revenue and $1.3 billion in net profit. However the business in which Monsanto operates is highly seasonal and the company tends to make most money in its first half of the year. While the company generates really high margins, lack of historical revenue growth in combination with high multiples make it a rich valuation.

Investment thesis

Monsanto operates at the intersection of major global growth markets including agriculture and biotechnology. Despite the long term favorable conditions, the company has hardly seen its revenue grow compared to 2008. Shares have even fallen from highs around $140 in 2008 to $80 at the moment, but still trade at premium valuations despite the fact that growth is not materializing.

Despite the guidance beat, which was largely driven by warm weather bringing deliveries forward, there are few drivers pushing shares back to over $100 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.