Sector Expectations Weigh Monsanto Down

By Greg Sushinsky | April 08, 2011 AAA

Leading seed and agricultural company Monsanto (NYSE:MON) reported increased second-quarter earnings and sales, news which was met unhappily as the market knocked down the company's share price. Analysts had expected a bit more from Monsanto, as they also hoped to see a raised full-year forecast, but instead the company merely affirmed the forecast already in place.

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Caught in the Cross Currents
Monsanto's report was naturally set to draw a lot of attention from the Street, as the company's not only a sector heavyweight, but its sector, agricultural stocks, have been hot. The company itself is still in transition as it's de-emphasizing its herbicide business while it continues to ramp up its GMOs, or genetically modified organisms, called genomics. Add to this that the second quarter is critical for Monsanto's fiscal year, as this is when the bulk of seed sales are booked, and nearly half its annual earnings are harvested.

Wall Street also scrutinized Monsanto more heavily, as it's looking for any twitch that might unwind the agriculture commodity boom, or even any hint of what's to come in the sector. ETFs, such as Market Vectors Agribusiness ETF (NYSE Arca:MOO) as well Powershares DB Agriculture Fund (NYSE Arca:DBA), can sensitively reflect any developments. This adds weight to the importance of anything that happens with Monsanto.

Results Aren't Always What Counts
Monsanto's net sales increased to $4.1 billion in the quarter, from $3.89 billion in the year ago quarter. An increase of 5% on seed and genomic sales to $173 million was part of this. The company discounted its new higher-end seeds to promote their adoption by farmers, an important strategy for Monsanto. Net income slightly exceeded the $1 billion mark, compared to $887 million in the second quarter last year. Reported EPS per diluted share was $1.88, compared to $1.60 in last year's Q2. Rising corn sales were the key to the profit increase, while U.S. soybean sales were strong, as was cotton.

Ag Products Battle
Monsanto plans to make slight price increases in its new multiple trait seed products in 2012. Although investors might have wanted price increases sooner, Monsanto has the scale to put these off yet still successfully battle other seed makers such as Dupont (NYSE:DD) and smaller Syngenta AG (NYSE:SYT). In the herbicide area, the combination of strong generics from China had been weighing on Monsanto's glyphosate products, yet the Ag Productivity division, which includes Roundup, posted a 10% increase in sales this quarter.

The Bottom Line
Monsanto continues to forge ahead with its business re-mix. The results beyond the earnings, which are better than the Street appreciates, in such areas as free cash flow, are impressive. The company's free cash flow for the first half of the year was a healthy $917 million, and should continue to be strong through the remainder of the year. Although the stock had run up along with other ag stocks, Monsanto is really a much longer term play, even within this cyclical (and now volatile) industry. (To learn more, see Cyclical Versus Non-Cyclical Stocks.)

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