Can Monsanto Repeat This Quarter's Surprising Performance?

Monsanto overcame difficult headwinds this quarter, but the industry will continue to have a difficult year.

Apr 16, 2014 at 10:00AM

If companies can have a spirit animal, Monsanto (NYSE:MON) would be a honey badger, because despite protests and even state ballot initiatives aimed at labeling or even banning products with genetically modified organisms (GMOs), Monsanto's bottom line just doesn't care. In its recent quarter, the company reported that sales had increased by close to 7%, while earnings per share rose 15%.

Monsanto faced a lot of headwinds this quarter and will continue to for the near future, so the question is, will the company continue to reward investors?

What went right
This year is likely to be difficult for many agricultural companies. The price of corn has fallen sharply from its record highs, and with it farm incomes. The USDA estimates that farm income will fall by 26.6% this year, to its lowest level since 2010. Not only does that put a damper on the ability of farmers to buy new seeds and other supplies, but the low price of corn may discourage them from buying supplies even if they had the money. Already, corn farmers are expected to plant 4% fewer acres this year than last.

This negative environment makes it impressive that Monsanto was able to increase sales of its corn seeds by even 4% in the second quarter, especially considering corn seed sales fell by 7% previous the previous quarter. That's a blessing for Monsanto investors, as corn seeds and traits accounted for almost 60% of the company's total sales this quarter. While my colleague Neha Chamaria points out that Monsanto's soybeans unit showed strong growth, soybean seeds and traits only accounted for 14% of total sales this quarter, underscoring how important corn is to Monsanto.

What could go wrong
One of the most prominent issues Monsanto faces is always regulatory and consumer opposition to its products. Last year, Connecticut and Maine passed laws requiring labels for products containing GMOs, and by September, similar legislation was pending in 20 different states. Several food producers and retailers are similarly taking it upon themselves to either voluntarily label their own products or require all products in their stores to have labels.

Monsanto is fighting back. The Grocery Manufacturers Association, of which Monsanto is a member, is backing a bill recently introduced by Congressman Mike Pompeo called the "Safe and Accurate Food Labeling Act." The bill would ban individual states from requiring labels for products containing GMOs. Even if you're pro-GMOs and think labeling laws are misguided, federally banning those laws seems like a bad idea -- consumers have a right to make misguided decisions if they want to. And if you're anti-GMOs, this law definitely doesn't help Monsanto's negative reputation, which recently earned it the title of second-worst company in America.

Consumer backlash aside, Monsanto also has operational concerns to worry about. First there's the matter of this year's farm incomes, which Monsanto has so far overcome but may still be hurt by as the year goes on. Then there's the company's recent acquisition of the Climate Corporation, which uses weather and other agricultural data to provide farmers with precise planting suggestions.

Monsanto says the technology can improve corn yields by 10 bushels per acre, but so far, only about 14% of farmers  use this kind of technology, and the Climate Corporation had yet to show a profit before Monsanto acquired it last quarter. While it's likely that more farmers will adopt precision planting farming in the future, it may be a long time before the $930 million acquisition provides shareholders with much benefit.

The Foolish bottom line
Frankly, I'm not too worried about labeling laws or Monsanto's public image. Much like the cable company that narrowly beat Monsanto in Consumerist's "Worst Company in America" bracket, Monsanto is in a position where it doesn't really need to care much about its image, which is probably part of why people dislike the company.

I'm more concerned about Monsanto's ability to continue overcoming industry headwinds over the next few quarters and what its foray into precision farming will do for shareholders. Especially given its high valuation compared to its competitors, Monsanto has some tough expectations to live up to.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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