Thursday, September 10, 2009

Richly-valued Monsanto reduces expectations again (MON)

AlphaNinja - Agricultural behemoth Monsanto (MON) shared some less-than-impressive earnings guidance with the street this morning. I have previously noted how expensive these shares are, and a disappointment like today's announcement should take a big bite out of the company's rich valuation. Multiple firms have downgraded the shares today.

While leaving 2009 earnings guidance in place at $4.45 versus the street's $4.41 estimate, Monsanto guided to the downside on 2010 guidance of $3.20 versus street expectations of $4.12. The stock is off 7% right now, as investors rethink the premium valuation afforded this stock.

Once again, a large part of the decreased expectations come from "revisions" to Roundup weed killer sales. Just as grocers see it with detergent and salad dressing, Monsanto is seeing a permanent "trade down" to other brands, as I mentioned in May and again in June, when the company announced "New Competitive Dynamics Change Outlook for Roundup Franchise."

In today's release, the company announced drastic reductions in the division's potential gross profit contribution:

"Globally on the farm, the underlying economic proposition is still positive and the need for more yield is still a valid near- and long-term assumption; on the other hand, there is some near-term supply/ demand imbalance in the chemical side of agriculture," Casale will say. "We are now managing our way through a competitive spike in the supply of generic glyphosate. The financial effect for us has been that we are now targeting to optimize the gross profit from Roundup® and other glyphosate-based products at $1 billion annually. While we can see a path to the $1 billion target in 2012, there are multiple headwinds causing us to forecast below that mark in the next two years."

After citing that news, the release notes the positive "macro" tailwinds helping them in the long run:

By 2030, the world population is expected to top 8 billion people, with rising income levels that will shift dietary preferences to more animal protein consumption, Casale will say. Monsanto is uniquely positioned to meet this incremental demand with its global germplasm pool and robust pipeline that are enabling advances such as drought-tolerance and yield.

That's lovely, but we're now looking at a 2010 FCFY(Free Cash Flow Yield) of 3-4% or less -->> far too rich for a company that is continuously disappointing.

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