Friday, April 1, 2011

Monsanto Co. (NYSE: MON): Q2 Earnings Preview 2011

Monsanto Co.

Monsanto Co. (NYSE: MON), the world's largest seed company, is scheduled to release fiscal second quarter earnings before the opening bell on Wednesday, April 6, 2011. Analysts, on average, expect the company to report earnings of $1.85 per share on revenue of $4.15 billion. In the year ago quarter, the company reported earnings of $1.70 per share on revenue of $3.89 billion.

Monsanto Company provides agricultural products for farmers in the United States and internationally. It operates in two segments, Seeds and Genomics, and Agricultural Productivity. 

In the preceding fiscal first quarter, the St. Louis, Missouri-based company's netwas $6 million or $0.01 per share compared with a loss of $19 million or $0.03 per share a year earlier. On an adjusted basis, the company earned 2 cents per share in the latest quarter. Revenue increased 8% to $1.83 billion in the quarter from $1.69 billion a year ago. Analysts, on average, expected the company to report earnings of 2 cents per share on revenue of $1.80 billion. 

At its last earnings call in January, Monsanto said that it expects fiscal 2011 earnings of $2.69 to $2.79 on a reported basis. The company also reaffirmed its adjusted earnings outlook range of $2.72 to $2.82 per share. The company expects that effectively all of its earnings will be in the second and third quarters with Q2 as its biggest quarter and Q3 pulling in the biggest year-over-year growth. Monsanto also reiterated free cash flow outlook for fiscal 2011 in the range of $800 million to $900 million, reflecting an investment of $600 million to $700 million in capital expenditures.

The company has been orchestrating a restructuring designed to move it away from its less profitable herbicide division and focus more on developing new strains of genetically engineered crops. Monsanto is creating a separate division for its struggling herbicide business to help stabilize and "better align spending and working capital needs" around the unit, which has been hurt by  generic competition and price pressure. The company now anticipates a steady-state gross profit contribution of $250 million to $300 million from the Roundup and other glyphosate-based herbicide business.

The company is now trying to spur growth by focusing on its seeds-and-traits business, positioning it for mid-teens earnings growth going forward. Corn seeds and traits contributed approximately 40.6% of total revenues in fiscal 2010. Monsanto also intends to increase corn plantation in Argentina, the world’s second-largest corn exporter, to 52%. However, Monsanto is also facing stiff competition in biotech seed market as its chief rival DuPont (NYSE:DD) is fast grabbing market share by offering products with fewer traits and at better prices.  Monsanto also faces foreign currency risk since a significant portion of its income comes from outside the U.S.

Broadly speaking, the agricultural sector has remained strong for the past few quarters as a result of strong pricing and robust demand. Farmers had been stingy during the previous year due to struggling crop prices. However, a recent drought in Russia has hurt wheat supplies, helping grain and oilseed prices grow. Also, the growing use of ethanol as a fuel has caused corn prices to skyrocket to over $6 per bushel. These positive market conditions have once again enabled farmers to take the necessary steps to ensure they are receiving maximum crop yields.

Last month, the company said that it has acquired Divergence Inc., a privately-held St. Louis-based biotechnology research and development company. Divergence currently focus its work on parasitic nematodes, including developing biotechnology traits for nematode control and nematicides with novel modes of action and superior safety profiles.

The company's stock currently trades at a forward P/E (fye Aug 31, 2012) of 21.44 and PEG Ratio (5 yr expected) of 1.60. 

Full Disclosure: None.
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