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Tickers in this Article: MON, DE, ADM, BG
Agricultural giant Monsanto (NYSE:MON) recently reported 2010 second quarter earnings of $1.60 a share, a 19% drop from $1.97 in the year ago quarter. Overall sales were a bit more resilient, down nearly 4% quarter over quarter. Overall margins were lower in the quarter as well. Gross margins were 54% versus 62%, while net profit margin dropped to 23% from 27% in the 2009 second quarter. The company cited a lower selling price for its popular herbicide Round-Up as a primary factor for the decline in sales and income.

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Great Expectations
While Monsanto remained confident that its full year profit guidance would be met at the lower end of the range, the company explicitly stated that its previous goal of doubling its 2007 gross profit number by 2012 now looks out of reach. For fiscal 2007, Monsanto earned a gross profit of $4.2 billion dollars. In fiscal 2008 and 2009, gross profit was $6.1 billion and $6.7 billion, respectively. So far, for the 2010 six months gross profit was $2.8 billion, down from $4 billion in the first half of 2009.

It's clear that all industries, including agricultural, are down from peak operating levels, supported by corn prices that were above $13 a bushel at one point. When agricultural commodity prices are down, farmers put on the brakes on their inputs - fertilizers, seeds and other agricultural chemicals. Monsanto clearly sees that it may not be possible to attain this goal without sacrificing long-term value creation at the expense of a short term goal. (For more, see The Impact Of Recession On Businesses.)

Realistic Expectations
While the market may not be happy with this news today, a little dose of reality will put things in perspective. Doubling a number in five years requires an approximate 15% annual growth rate over that time. That type of growth is a tremendous feat for any company, much yet less one like Monsanto working with billions of dollars. Other giant agricultural names like Deere (NYSE:DE) and Bunge (NYSE:BG) have not grown gross profits at that rate over the past several years. The only one that came close was Archer Daniels Midland (NYSE:ADM), but that was a result of a nearly 20% growth in gross profit in 2008. And these companies are excellent businesses with great growth potential ahead.

However, Monsanto did indicate that it sees the company's future with growth in the mid-teens over a longer stretch. That's an amazing goal, and one that few companies can claim to make. Monsanto stands a good chance of meeting those goals. The world continues to face the ultimate agricultural dilemma: feeding more mouths with fewer acres of arable land. In addition, in many of the worlds most populous areas, water availability is a big problem. Monsanto solves this problem with its disease and drought resistant seeds. The growth opportunity exists and Monsanto dominates the seeds business.

The Bottom Line
There's little doubt that over the years Monsanto will be a more profitable company. Investors who were hoping for significant growth over a short period of time will likely be disappointed. This could lead to a revaluation of the shares which could create a better buying opportunity for patient seeking value investors. (For more, see The Value Investor's Handbook.)

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