Monsanto Building Momentum (MON)

By Dean Lundell | October 03, 2007 AAA

Monsanto (NYSE:MON) recently reported its earnings, or lack thereof, for its fourth quarter. Earnings came in at a loss of 18 cents per share from ongoing operations, failing to meet the consensus estimates of a loss of 17 cents per share by a single penny.

The company, which specializes in genetically modified seeds, had a weak quarter, but its overall health looks strong. Monsanto's yearly numbers are solid, and its focused research and development should pay off in the long term.

A Weak Quarter
The purveyor of genetically modified seeds posted a net loss in total of $210 million, but that included a one-time charge of $186 million for in-process research and development at the company's Delta & Pine Land cotton business. This compares with a net loss of $144 million or 27 cents per share a year earlier. (To learn more, see In-Process R&D Charge Offs: The Bad And The Ugly.)

Quarterly sales actually rose 13% to $1.57 billion from $1.39 billion a year ago. However, analysts polled by Thompson Financial were looking for sales of $1.66 billion.

Strong Year Despite A Weak Quarter
For the year, Monsanto fared much better, seeing record sales of $8.6 billion, 17% higher than in the year prior. Key drivers that contributed to that growth were higher worldwide corn-seed revenue as well as an increase in sales of Roundup and other herbicides.

Net income for the year amounted to $993 million for $1.79 per share, which is a big improvement over the net income of $689 million ($1.25 per share) the firm saw in 2006. Going forward, Monsanto's guidance reflects an expectation of reasonably strong growth, with earnings per share on an ongoing basis of $2.20 to $2.40 per share, which is a bit weaker than the $2.47 the market was expecting. (To learn more, check out Understanding The Income Statement.)

What's Next?
Monsanto's commitment to research and development has paid off for the company and its investors. Over the past couple of decades, this firm has plowed billions into developing its genetically engineered seeds and still commits 9.1% of its revenue to research and development. Recently, Monsanto reached an agreement with Dow Chemical (NYSE:DOW) to cross-license technologies that will result in an even better product for farmers to grow and the rest of us to eat.

Farmers are not unlike investors in that they seek to reduce and diversify their risk. Knowing that has been key to Monsanto working with researchers to develop new technologies and build the company's pipeline of new and better products. With that type of model, Monsanto's costs are basically fixed, and to generate further returns on its fixed costs, the company has placed an increased importance on international markets, particularly in Europe and South America. This is demonstrated by its recent acquisition of the Brazilian corn-seed company Agroeste Sementes.

The only problem area is ethanol prices. Margins on this particular product have been slipping and are largely expected to slip even further throughout 2008. At this point it's hard to gauge how far prices will fall and what the market's reaction will be.

Bottom Line
Monsanto is No.2 in its market, with a 24% market share, behind DuPont's (NYSE:DD) 30% share. It is clear from Monsanto's commitment to its investors that this company is not resting on its laurels (expressed by its recent 40% increase of its dividend, its dedication research and development, and its acquisitions around the world). If Monsanto's efforts continue with the same quality, the stock's strong upward movement will likely continue.

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