Investors and Wall Street analysts love it when companies underpromise and overdeliver, which is exactly what agricultural tools supplier Monsanto (MON) accomplished for the first quarter ended November 30 for its fiscal year 2015. The company achieved higher than expected sales on stronger than expected soybean performance, which has anchored growth as its corn segment has faltered in recent quarters. Beating estimates wasn't easy to pull off, especially considering the challenging environment in currency markets, and significant headwinds remain for the year ahead. What should investors think about the progress? More importantly for long-term investors, will the obstacles affect the company's ambitious growth plans? Here are five things Monsanto management delivered in the company's first-quarter earnings conference call that it wants you to know.
Short-term headwinds won't stop growth
Things aren't so great right now for companies supplying tools to the agricultural industry. Chairman and CEO Hugh Grant summed up the dismal state of affairs while reminding investors to take the long-term view:
The currency and acreage headwinds that we faced in fiscal year '14 remain. Yet we stand firm in our ability to grow while we are investing in new platforms in this environment, but we won't get ahead of the business as the most significant seasons in the northern hemisphere are yet to come.
The United States, historically the largest customer for advanced agricultural tools, is coming off a record harvest for both corn and soybeans. That could lead to slower growth in the year ahead if stockpiles remain high and international markets don't open up to increased exports. Meanwhile, the American dollar is dominating global currency markets at the moment, which makes it costlier for multinational corporations to exchange foreign currencies. Expect some record currency adjustments in 2015 for most of your investments exposed to global markets, especially for South American-heavy Monsanto.
Corn-soybean rotations weigh on corn performance
Last year's record corn harvest also favors a trend that is quite unfavorable for Monsanto, as noted by CFO Pierre Courduroux:
For every 1 million acre shifting from corn to soybeans in the U.S., we see roughly a $0.03 decline in our earnings per share.
Farmers are finding it advantageous to cycle between corn and soybeans. Market prices play an important role, but input costs are the primary factor. Studies have demonstrated that planting corn after a soybean harvest can reduce a farmer's nitrogen fertilizer demand by up to 20 pounds per acre, compared with planting corn year after year. (The fertilizer savings are owed to the ability of soybean residue to decompose more quickly, thus returning nutrients to the soil more quickly.)
Well, it's time to begin shuffling acres around again. American farmers planted about 83 million acres of corn for the 2014-2015 harvest, compared with 71 million acres of soybeans. Market prices, individual farm economics, and export trends may favor more soybean acreage for the 2015-2016 harvest.
Monsanto generates significantly more revenue from corn seeds and traits ($928 million in the last quarter) than soybean seeds and traits ($396 million in the last quarter), but recent growth has favored soybeans. Consider that Monsanto's corn sales declined 12% from the year-ago period, while soybean sales increased 48% in the same period. Gross profit followed suit, falling 21% for corn and growing 65% for soybeans. Investors can expect that to continue in the near term -- and maybe the long term, too. Courduroux explains:
Our next generation of soybean technologies will be a core driver in delivering growth, with a key proof point coming from the more than $100 million in gross profit growth and the seven points of margin lift that we saw in soybeans in [the first quarter].
The company's latest soybean portfolio, Intacta Roundup Ready 2 PRO, is on pace to become a blockbuster. The varieties raced to a record acreage count in just their second year on the market -- exceeding the high range of guidance of 10 million to 12 million acres. Monsanto is also ready to unleash its Roundup Ready Xtend soybean traits, which it expects to dominate most of the 200 million acres in North America and South America in much the same way its corn traits have dominated. Corn's outright reign over the company's income statement may be nearing an end.
The pipeline has grown beyond breeding and biotechnology
Expanding on that last point with a broader stroke, it appears that breeding and biotechnology (seeds and traits) efforts will soon be making way for more diverse tools and services. As CTO Rob Fraley pointed out:
We've graduated from the days when the pipeline reflected just breeding and biotechnology. Today our R&D approach marries our core pipelines with three transformational growth platforms, allowing us to talk about a truly integrated approach to yield.
Let's not get carried away here: Seeds and traits will remain Monsanto's core business and anchor. However, the company's pipeline now includes:
- A promising microbial portfolio that seeks to coat seeds in beneficial soil microbes to boost yield.
- The BioDirect portfolio of non-transgenic topicals for fighting pests (for crops and bees) and boosting yields.
- A software platform bringing the Internet of Things to individual farmers.
The latter may be the youngest product in the pipeline, but it doesn't have to jump through all of the development hurdles to reach the market. So while microbials and BioDirect products progress through pipeline checkpoints in the next few years, the Climate Platform will be delivering profits to investors and adding new features in side-by-side fashion. Investors can thank its rapid product development timeline.
Climate Platform will develop more quickly than traditional products
After all, it is a software platform. That means it will be accompanied by a software product development timeline -- not a traditional biotechnology product development timeline -- that is much shorter than Monsanto's traditional products. It may seem obvious when you think about it, but it's a point Fraley took the time to explain to investors.
Software as a service is a new domain for Monsanto, but the application of the data science to our extensive field trial and genetics data is allowing the development and application of unprecedented value creation for agriculture delivered through software.
With only a little over a year since the acquisition, we've already integrated key existing products and services to provide greater unique value and more unified service offerings to growers including the combination of software, connectivity, in-field solutions, and equipment.
The Climate Platform will play a critical role in Monsanto's plans to grow annual gross profit by $4 billion, or 61%, by 2019.
Still on track to double EPS by 2019
Monsanto will face headwinds in 2015, but it still expects to grow EPS to between $5.75 and $6.00 during the fiscal year. That would continue the incredible growth investors have enjoyed (EPS were just $2.39 in 2010), although the best is yet to come:
When combined with our disciplined and balanced approach to funding our growth platforms and our continued commitment to effective capital allocation, I am confident we're on track in the first year of our five-year plan to at least double our ongoing earnings per share by 2019 and effectively return value to our owners.
For the record, Monsanto expects to double EPS from its 2014 fiscal year, which means the company needs to grow EPS from $5.23 to $10.46 in just five years. Ambitious? Yes. Possible? Through a combination of core business growth, new product introductions, an innovative pipeline, and share repurchase programs -- yes.