Wednesday, May 27, 2009

Monsanto (MON) down 4% on weaker Roundup sales.

AlphaNinja - The market is reacting kindly to this earnings guide-down from a very expensive company. While results will show continued growth in the seeds and traits business, Monsanto's Roundup and similar businesses will bring in $2billion in gross profit, down from previous expectations of $2.4billion. The earnings revision may have been worse had the company not also responded by cutting marketing and administrative costs. Certainly not a disaster, but this company enjoys a very pricey valuation that it must continue to validate.

Weather-related delays in Roundup sales might indicate that those sales were postponed rather than lost, but Monsanto's press release mentions share loss to generics, as Monsanto attempted to "protect the brand" with higher prices....

"Cooler, wetter weather in some parts of the U.S. Corn Belt has delayed the application timing of Roundup and other glyphosate-based herbicides over the top of Roundup Ready crops this spring. At the same time, generic and other branded competitors continue to aggressively move larger-than-expected volumes of lower-priced material into the marketplace. While Monsanto's supply of Roundup in the distribution channel is within its historical range, the application of the product is half that compared with product use at the end of May 2008.

Supply of glyphosate is now exceeding demand globally. In the United States, Monsanto has chosen to focus on protecting the premium of its high-performance products, which is having the effect of reducing volumes. The company now anticipates total volumes sales of approximately 200 million gallons, with a net average selling price for its approximately 110 million gallons of branded Roundup globally of more than $20 per gallon."

Monsanto predicts 2009 free cash flow of $1.4billion, a paltry 3.3% of its market valuation. Adjusting for near-term working capital burdens, the next few years should see basic free cash flow around $2.5billion, still only 6% of Monsanto's market value. Pretty expensive, regardless of how well this company's future looks.

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