Why Throw Tomatoes at Monsanto?

There wasn't a lot to complain about in Monsanto's (NYSE: MON  ) third-quarter earnings report, released Wednesday, but investors are finding enough disappointing news to send the stock down. Because the stock had nearly doubled in the last year and has a P/E above 40, I can understand how investors might be a little quick to hit the sell button.

Sales were up more than 26% year over year, thanks to increased sales of seeds and Roundup. Seed sales, led by soybean and cotton seeds, were up 20% year over year. Corn seed sales ramped up as well, helping Monsanto pick up market share for the seventh straight year in the space it shares with rivals like Syngenta (NYSE: SYT  ) and DuPont (NYSE: DD  ) . Corn seed sales were up just 9.4%, but because much of that is Roundup Ready seed, it indirectly contributes to the herbacide revenue, which was up a whopping 54% year over year.

The bottom line looked impressive, too, with Monsanto's income up 42% over the year-ago quarter. Some of that was because of a reduced tax burden, but expanding operating margins also helped the bottom line grow faster than the top line. The results led Monsanto to raise its full-year profit target to $3.40, excluding extras.

So what was the bad news? Revenue wasn't quite as high as analysts had expected, although the bottom line did just fine. The other issue seems to be with margins in the seed business, which slipped a little. Monsanto is expecting margins to bounce back next year as sales of higher-margin biotech seeds pick up.

Investors certainly have a reason to be jittery. At least some of Monsanto's gains have come from the commodities bull market, which has allowed it and other agricultural companies like fertilizer producers Mosaic (NYSE: MOS  ) or Potash Corp. of Saskatchewan (NYSE: POT  ) to charge rich prices for their products. Fortunately, Monsanto's drive toward developing seeds with higher yields should help boost its long-run pricing power. Fools who are thinking long-term can probably back away from the sell button and enjoy the ride while it lasts.

Motley Fool Rule Breakers is always on the hunt for high-growth industries. See all of our latest discoveries with a free 30-day trial

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 673257, ~/Articles/ArticleHandler.aspx, 4/16/2014 6:58:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement