Monsanto Wilts on Earnings, Guidance Shortfalls Despite Long-Term Optimism

The agricultural productivity company has a bright future, but it won't come fast enough to satisfy short-term traders.

Dan Caplinger
Dan Caplinger
Oct 7, 2015 at 9:21AM
Energy, Materials, and Utilities

Image: Monsanto.

The agricultural industry has become a haven of high technology, and Monsanto (NYSE:MON) has helped pioneer industry-changing techniques to develop numerous ways to help farmers enhance productivity. Yet agriculture also faces inevitable cycles, and Monsanto has had to deal with falling crop prices that make its customers less motivated to spend money on its products.

Coming into its fiscal fourth-quarter report Wednesday morning, Monsanto had investors hoping that it would be able to minimize expected losses from tough conditions in the ag industry. The company's results instead included some troubling news, not just to finish the 2015 fiscal year, but also for 2016. Let's look more closely at Monsanto's latest results, and whether investors should look beyond where short-term traders are focusing their attention.

Why Monsanto disappointed investors
Monsanto's fiscal fourth-quarter results included some unexpectedly bad news. Revenue slumped to just $2.36 billion, which was down more than 10% from the year-ago quarter, and fully $400 million less than investors had expected to see. Figures on the earnings front were even more troubling, with Monsanto losing $495 million, more than tripling its loss from last year's fiscal fourth quarter. Even after making adjustments to reflect the one-time nature of restructuring charges and other factors, an adjusted net loss of $0.19 per share was far worse than the consensus forecast for a $0.02 per-share loss.

Monsanto's weakness showed up throughout the company's various divisions and products. The seeds and genomics segment saw sales drop 9%, to $1.25 billion, with cotton-seed sales getting cut in half, and corn, soybeans, and vegetable seeds all falling from year-ago levels. The segment's pre-tax operating figures worsened substantially, although about two-thirds of the $773 million loss was attributable to restructuring costs and a possible settlement with the SEC. In its agricultural productivity business, Monsanto saw even steeper revenue declines of around 12%, to $1.10 billion, as pre-tax operating income posted a nearly 30% drop.

With a gloomy quarter, Monsanto tried to focus on the year as a whole. Full-year adjusted earnings of $5.73 per share were 10% higher than in fiscal 2014, and the company also pointed to currency headwinds that cost it roughly seven percentage points of potential growth. Declining acreage in corn also hurt Monsanto's seeds and genomics results, while low prices for glyphosate weighed on the Agricultural Productivity division.

Keeping a long-term focus
CEO Hugh Grant kept his message on the long-run view for Monsanto. "The fundamentals of our business are strong," Grant said, "and Monsanto remains the best positioned company in the industry." Grant pointed to ongoing progress in meeting the company's goal of doubling its earnings per share between 2014 and 2019.

Yet Monsanto's 2016 guidance came as a shock to those following the company. The ag giant expects adjusted earnings of $5.10 to $5.60 per share, far less than the $6.20 per share that analysts have predicted. Monsanto said that the strong dollar would cost it $0.35 to $0.40 per share, with poor prices for crop chemicals costing $0.50 to $0.85 per share, and higher costs for some of its products hitting results by another $0.20 to $0.30 per share. To reassure investors, the company pointed to a big ramp-up in earnings beginning in 2017, setting the expectation of annual growth to exceed 20% at that point.

What's obvious from Monsanto's results is that the company is working hard to focus on its own internal growth opportunities. The company ended its $46 billion attempt to buy out rival Syngenta (NYSE:SYT), as its previous efforts had been rebuffed. Instead, Monsanto is looking at enhancing the value of franchises like its Intacta RR2 Pro soybean product and its digital-agricultural platform.

Despite the long-term optimism that Grant and Monsanto have about the company's future, shareholders weren't so certain, sending the stock down nearly 3% in pre-market trading following the announcement. Few seem to question Monsanto's ability to shine in the industry, but until the agricultural sector itself starts to rebound from its recent difficulties, it might be difficult for Monsanto shareholders to expect a big bounce from the stock's 30% drop since early 2015.