Monday, October 3, 2011

Monsanto Co. (NYSE: MON): Q4 Earnings Preview 2011

Monsanto Co. (NYSE: MON), the world's largest seed company, is scheduled to release fiscal fourth quarter earnings before the opening bell on Wednesday, October 5, 2011. Analysts, on average, expect the company to report a loss of 27 cents per share on revenue of $1.89 billion. In the year ago quarter, the company posted a loss of 9 cents per share on revenue of $1.95 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 second-quarter, the St. Louis, Missouri-based company's net income was $680 million, or $1.26 per share, compared to $384 million, or $0.70 per share, in the year-ago quarter. On an adjusted basis, the company earned $1.26 per share in the latest quarter. Revenue grew 21 percent to $3.59 billion from $2.96 billion in the same quarter last year. Analysts, on average, expected the company to report earnings of $1.10 per share on revenue of $3.36 billion.

At its last earnings call in June, Monsanto boosted its earnings guidance to a range of $2.82 to $2.86 per share from the prior range of $2.66 to $2.79 per share, and ongoing earnings guidance to a range of $2.84 to $2.88 per share from the prior range of $2.72 to $2.82 per share. Monsanto also lifted its outlook for free cash flow for the year to a range of $1.1 billion to $1.3 billion from the prior range of $900 million to $1.1 billion.

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. These positive market conditions have once again enabled farmers to take the necessary steps to ensure they are receiving maximum crop yields.

Monsanto expects to increase prices for its key corn seed brand by 5% to 10% in 2012.The company anticipates farmers will shift to new, higher-yielding seeds.

Full Disclosure: None.
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