3 Big Takeaways From Monsanto Company's Earnings

Anti-GMO activists who disagree with Monsanto's (NYSE: MON  ) practices may take this as a slap in the face: The seed king trampled Street estimates for its third quarter, improved its outlook, and outlined a long-term plan that could attract investors in hordes, even if they don't want to see genetically modified foods on their breakfast table. Monsanto shares surged 6% soon after it made the announcements this past Wednesday.

And if that wasn't enough to excite investors, arch rival DuPont  (NYSE: DD  ) trimmed its full-year outlook just yesterday, citing weakness in its agriculture business. Monsanto is clearly doing its job well, which was evident in its earnings report. Here are three reasons this earnings report wasn't an ordinary one.

Every number has a story to tell
As against Street estimates of 3.6% year-over-year improvement in revenue, Monsanto reported flat sales for the quarter at $4.25 billion. Lower corn acreage in the U.S. dealt the biggest blow, pushing the company's corn seed sales down 16% year over year. Weak corn sales are also the primary reason DuPont lowered its full-year outlook.

Lower corn acreage shouldn't worry Monsanto investors. Source: Monsanto.

But thanks to its strong leadership position in the soybean market, Monsanto's soybean seed and trait sales jumped 24% year over year, helping offset much of the weakness in corn. DuPont, on the other hand, relies primarily on corn for profits and has limited presence in soybeans.

Meanwhile, Monsanto's agricultural productivity division, which primarily sells crop protection products aside from lawn-and-garden herbicides, delivered another good quarter, with 1% higher sales year over year. That may sound insignificant, but only until you recall that the company had an exceptionally strong third quarter in 2013 after glyphosate prices firmed up. Monsanto's Roundup herbicides are clearly in demand, which is great news for the company going forward.

More notably, investors should find it encouraging that Monsanto's gross profit improved 3% in the third quarter despite lower corn seed sales, suggesting that soybeans are as profitable for the company as corn is. Corn has traditionally been its biggest revenue and profit driver. But if it weren't for higher taxes versus last year (the company enjoyed a major one-time tax benefit in Q3 2013), Monsanto would've done better than report 6% lower net income year over year. If you're wondering why the market still got excited, Monsanto crushed Street estimates by a gaping margin and turned in a profit of $1.62 per share. That's only 4% lower year over year, thanks largely to the company's aggressive share buyback program.

Monsanto's making money ... for you
Monsanto not only beat Street estimates, but also improved its full-year earnings-per-share outlook, which really fueled the market's optimism. Having raised the lower end of its previous EPS guidance by $0.10, the company now expects to earn between $5.1 billion and $5.2 billion for the full financial year. That represents at least a 12% improvement over last year.

What's more, Monsanto expects to hit the upper end of its full-year free cash flow outlook at $700 million to $800 million. The more free cash the company has, the greater the potential returns for shareholders. Here's an amazing fact you may not have known: Monsanto returned nearly all of the free cash flow it generated in fiscal 2013 to shareholders as dividends and share buybacks. And it looks like the company wants to continue with the trend: It announced a fresh buyback program worth a whopping $10 billion, to be returned over the next couple of years.

Monsanto plans to finance the share repurchase by raising debt worth $4.5 billion. That may not sound like a prudent measure, but it's worth noting that the company has enough leeway to use leverage to improve shareholder returns. Its total-term-debt-to-equity ratio currently stands easy at 21%, and its operating earnings can cover interest payments a good 21 times over.

Unmatched visibility
Monsanto outlined a long-term growth plan that should make any investor drool. It hopes to at least double its earnings per share within the next five years. How many times have you come across a company that's so confident about its future despite running a business that's mired in controversies? The following graph captures Monsanto's long-term vision.


Source: Monsanto Q3 earnings presentation.

Monsanto isn't worried about all the noise against GMOs and projects its seeds and traits business to generate an additional gross profit worth $4 billion by financial year 2019. For perspective, the business earned $6 billion in gross profit in each of the last two financial years.

Aside from its core seeds business, Monsanto also sees tremendous promise in the field of big data, following its acquisition of Climate Corporation last year. Together, it is betting on seeds and big data to hit that phenomenal growth levels by 2019.

It doesn't end here
Going by its projections, Monsanto looks like a winner in the making. Quarterly numbers don't matter much when a company has such big plans laid out for the longer term. If you're wondering how Monsanto will meet those targets, it has a game plan ready. I'll talk more about those opportunities in an upcoming post, so stay tuned.

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  • Report this Comment On June 28, 2014, at 2:01 PM, funfundvierzig wrote:

    Our take for the week just past: Superior-managed Monsanto is widening its gap with its nearest lagging competitor, E. I. du Pont de Nemours and Company.

    While the leaders of Monsanto were improving their outlook for the year and beyond, announcing a $10 billion stock buyback, the bumbling bosses of DuPont were busy slashing their outlook, and cosmetically blaming it on the "weather" and farmers for not buying enough of their Pioneer corn seeds.

    ...funfun..

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