Long-Term Monsanto Investors Wait For A Significant Pullback

| About: Monsanto Company (MON)
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Shares of Monsanto (MON) ended the week roughly flat. The provider of seeds and agricultural productivity enhancement solutions reported its fourth-quarter results on Wednesday.

Fourth-Quarter Results

Monsanto reported fourth-quarter revenues of $2.11 billion, down 6.1% on the year. Revenues for the final quarter came in below analysts' consensus of $2.23 billion. Traditionally, the fourth quarter is the weakest as farmers in the U.S. and Europe have not yet started to purchase seeds for spring planting .

The company reported a gross profit of $881 million, down from last year's $972 million. The company reported a net loss of $229 million, or $0.44 per share. This compares to last year's loss of $0.22 per share. The net loss for the fourth quarter was in line with analysts' expectations.

For full-year 2012, Monsanto generated revenues of $13.5 billion, up 14% on the year. The company reported a net profit of $2.04 billion, up 27% on the year. Full-year earnings per share came in at $3.70 per share. Chairman and CEO Hugh Grant commented on the results:

We've proven our business on a global stage with back-to-back years of tremendous performance and momentum. With more waves of innovation and global opportunities than ever before, I'm confident that by building off what we accomplished in 2012 we can achieve steady growth in fiscal year 2013 as we continue to deliver sustainable yield to our farmer customers.

Segmental Information

Seeds and Genomics: Revenues from the seeds and genomics division came in at $1.21 billion, down 10% on the year. Corn Seed and Traits revenues fell 12.4% to $588 million. Soybean Seed and Traits revenues rose sharply by 47.9% to $142 million. Vegetable Seeds revenues rose 6.4% to $284 million. Other Crops and Seeds revenues rose 26.5% to $172 million. The major disappointment came in the Cotton Seeds and Trait division, where revenues fell 84.0% to merely $29 million.

Gross profits for the division fell from $790 million to $631 million. Operating losses for the division came in at $387 million, compared to a loss of $157 million in the fourth quarter of 2011.

Agricultural Productivity: Revenues for the agricultural and productivity division came in unchanged at $895 million for the fourth quarter. Gross profits improved from $182 million to $250 million. Operating earnings more than doubled from $59 million to $123 million.


For its fiscal 2013, Monsanto expects to achieve mid-teens earnings per share growth. As such, the company expects to earn between $4.18 and $4.32 per share, up 15% compared to 2012 at the midpoint of the range. On average, analysts expected that Monsanto would boost the outlook for 2013 profits of $4.38 per share.

The Seeds and Genomics segment is expected to deliver gross profits around $6.55 billion, while gross profit for the Agricultural Productivity division is expected to come in around $1 billion. Free cash flow is expected to come in between $1.7 billion and $1.8 billion. Research and development spending will come in at $1.53 billion, largely unchanged from the expenditure of $1.52 billion in 2012.


Monsanto ended its fourth quarter with $3.6 billion in cash, equivalents, and short-term investments. The company operates with $2.1 billion in short- and long-term debt, for a net cash position of $1.5 billion.

The company did not guide for full-year 2013 revenues, but a number close to $14 billion to $15 billion seems reasonable. Full-year earnings are guided to come in around $4.25 per share. The market currently values Monsanto at $48.5 billion, valuing the operating assets at $47 billion. This values the company at 3.2 times annual revenues and 20 times annual earnings.

Currently, the company pays a quarterly dividend of $0.375 per share, for an annual dividend yield of 1.6%.

Investment Thesis

Year to date, shares of Monsanto have risen some 30%. Shares started the year at $70, and have traded between $70 and $80 for the first half of 2012. In July, shares broke out of the $80 resistance level and quickly rose to $91 at the moment. Shares rallied after the company raised its dividend by 25% and guided for strong performance.

Over the past five years shares have traded largely unchanged. Shares peaked at $140 in 2008, falling to a low of $50 in 2010. From that point in time shares steadily regained ground. Between 2009 and 2012, the company grew its annual revenues from $11.7 billion to $13.5 billion. Net income remained largely unchanged at $2.0 billion. The company boosted its annual dividend from $1.04 per share to $1.50 in the meantime.

Monsanto's fourth quarter is traditionally very weak. Fourth-quarter revenues came in at just 10% of annual revenues, heavily impacting the bottom line. While the fourth-quarter report was in line with expectations, analysts are slightly disappointed with the full-year 2013 guidance of profit growth of 15%.

The long-term prospects of Monsanto are undoubtedly very good, given the promising long-term prospects for the agricultural industry. However, shares already trade at 20 times 2013 annual earnings, a fairly high valuation despite the promising outlook.

While I like the prospects for the company over the next decade, I will not pick up shares at today's prices after they have gained some 30% already in 2012. Performance in the Seeds and Genomics division remains highly volatile, depending on the seasonal patterns. A serious pullback in shares might provide long-term investors with an excellent entry point.

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.