It takes a huge effort to feed the world, and much of the agricultural community relies on companies like Monsanto (MON) to come up with innovative ways to boost crop yields and make their business operations more profitable. Yet recently, lower crop prices have challenged ag producers, and coming into Wednesday's fiscal first-quarter report, Monsanto investors were bracing for a quarterly loss from the maker of seeds, fertilizers, and other ag products.
Monsanto's bottom line wasn't as bad as expected, but troubling trends have some investors concerned about the stock's future. Let's take a closer look at how Monsanto did last quarter, and what it sees ahead for the ag community going forward.
A mixed bag for Monsanto
Monsanto's fiscal first-quarter results gave investors only part of what they had hoped to see. On the sales front, Monsanto suffered a worse-than-expected 23% decline in revenue, to $2.22 billion, far lower than the $2.39 billion consensus forecast among investors. Extensive expenses related to the company's restructuring also hit Monsanto's bottom line, with a net loss of $253 million. The company's $0.11-per-share adjusted net loss was only about half the red ink that investors had expected to see.
With one single exception, Monsanto's sales declines came from across the company's segments. The seeds and genomics business suffered a 14% sales drop, to $1.40 billion. A nearly 20% hit to corn-seed sales had the biggest downward impact on the segment. Only soybean sales managed to post an increase, climbing 10% from year-ago levels, while the cotton and vegetable seed divisions both experienced falling sales.
Pre-tax operating results swung to a loss of $333 million, with the bulk of that coming from restructuring charges. Meanwhile, in the agricultural productivity segment, Monsanto's sales fell by more than a third, to $820 million, and pre-tax profit took an 85% hit to just $59 million.
Monsanto's executive team emphasized the opportunities that the company has. "In a challenging agriculture environment," CEO Hugh Grant said, "We remain in a position of strength ... that positions us to be a leading partner in an industry that will continue to change." Chief Technology Officer Robb Fraley shared his CEO's optimism, noting that, "this is an exciting time in agriculture and within our company as we continue to expand the breadth and pace of innovation."
What's ahead for Monsanto?
Despite its long-term opportunities, Monsanto could face tough times in the immediate future. The company said that it now expects its full-year adjusted earnings to come in toward the low-end of its previous guidance range of between $5.10 and $5.60 per share, citing the currency devaluation in Argentina as one contributing factor among many affecting the global economy, generally, and the ag industry, in particular.
Nevertheless, Monsanto sees a recovery ahead. Gross profit growth of 5% to 7% for the seeds and genomics business should come largely from greater use of new corn-hybrid products, adoption of its Intacta RR2 Pro soybean product, and expected new licensing opportunities that, in total, should add about $275 million to the company's take. Monsanto also expects a rise of 10% to 35% in gross profits for its agricultural productivity business, rising to $900 million to $1.1 billion as it aims to keep selling its products at premium prices compared to similar generic items.
The elephant in the room for Monsanto is what impact the anticipated merger between rivals DuPont (DD) and Dow Chemical (DOW) will have on its business. The two companies expect to complete their combination, but then break themselves up into three separate entities, one of which will focus specifically on agriculture.
With both Dow and DuPont having seed and crop protection businesses, combining the two has both companies excited about the potential for synergies and greater market share. That will make the combined Dow-DuPont entity a bigger force against Monsanto, and force it, once again, to consider strategic combinations of its own.
Monsanto shares didn't react strongly to the news, initially falling in pre-market trade immediately after the announcement, but then recovering to the unchanged level in the opening minutes of the regular trading session. Given the challenges in agriculture right now, Monsanto will have to prove its resiliency in adapting to changing conditions throughout 2016 and beyond.