Wednesday, June 24, 2009

Monsanto's quarter (MON)

AlphaNinja - Agricultural chemical concern Monsanto (MON) announced earnings for May's 3rd quarter of 1.25, versus street expactations of 1.17. Revenues came in at $3.16billion, well under the expected $3.45billion. The market won't be too excited about this "beat," as it comes after the company already reduced its earnings guidance on weak Roundup sales.

The earnings release alone is cause for immediate concern, in which the company announces:
New Competitive Dynamics Change Outlook for Roundup Franchise

In Monsanto's May realease they stated that Roundup sales weakness was largely "weather-related," yet now acknowledge what may look like a permanent "trade-down" to generic competetors. MON is creating a separate Roundup division to better align costs and focus on the product.

-->>Roundup issues aside, the Seeds and Genomics division, (71% of revenue), was up 10% year over year, helping to offset the disastrous 47% decline in Roundup sales.
-->>Gross profit during the quarer actually improved to 58% of sales from 56% in the year ago quarter.
-->>Selling and General Expenses drop to 16% of revenue from 17%
-->>Research & Development costs up to 9% of revenue, from 7%
-->>pretax income 32% versus 31% last year.

Monsanto breaks results down into two segments - put simply they're the seed division and the "productivity" division, the latter of which involves products like Roundup that protect and help the crops.

The seeds division had remarkable improvements year-over-year. While sales were up 10%, it's EBIT (earnings before interest and taxes) was up 37%. EBIT margin as a % of sales improved a whopping 7% year over year, and the division's contribution to total company EBIT improved from 53% to 80% --->>awesome performance.

The ag productivity segment had a dismal time, with Roundup sales down 47%. Divisional EBIT dropped to $211m from $501m, and the division now chipped in just 20% of the companywide EBIT.

Monsanto guided full year earnings to the low end of previous guidance, equating to about 4.40 per share - right in line with the street consensus. That's a PE of 19 based on MON stock trading up to 81.5 right now. Granted the company is a great operator, but that's a rich PE, especially while one division is in turmoil and the other is putting up numbers that will be very tough to replicate. The balance sheet is pristine though, so I don't expect much downside for Monsanto.

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