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Guidance Up; Stock Price Down

By Brian Orelli, PhD – Updated Apr 5, 2017 at 7:38PM

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Agriculture investors remain wary.

It's not often that a company raises guidance and its stock drops 16% on the day, but that's exactly what happened to Monsanto (NYSE:MON) yesterday.

The company increased its earnings-per-share guidance to around $3.59 this fiscal year, up from its range of $3.49 to $3.51 from just two weeks ago. Monsanto is scheduled to release official earnings next Wednesday; I wonder if the final earnings number will be even larger.

But investors are rightfully not all that interested in what happened in the most recent quarter. We tend to look forward, and there's a lot to be worried about.

On Wednesday, fertilizer maker Mosaic (NYSE:MOS) released lower-than-expected earnings, and worry that farmers may cut back on their need for high-priced fertilizer pushed down fellow makers Agrium (NYSE:AGU) and PotashCorp (NYSE:POT). Monsanto came along for the ride presumably because investors are worried that lower grain prices are going to put pressure on Monsanto's Roundup or seed prices. But the company increased its expected gross profits from Roundup for next fiscal year by almost 10%. That sounds a tad optimistic, but given the company's knack for beating its own estimates, it's hard to bet against Monsanto.

The bigger problem may be the credit crisis. It doesn't matter what the price of grain is, if farmers can't get loans to buy seeds from Monsanto and Syngenta (NYSE:SYT), or tractors from Deere (NYSE:DE), the entire agriculture sector will suffer.

Given that, I do like the long-term outlook for Monsanto and the rest of the agricultural industry, but the fact that much of the industry is tied to the price of grain scares me a lot. The prices of the stocks and grain have come down considerably, but I'm not ready to call the bottom quite yet. Investors would be wise to wait until fear has been completely priced in before jumping into the sector.

Let us know what you think as a member of our free investing community, Motley Fool CAPS. Make an outperform or underperform call on these companies; post a pitch about whether you think this is the bottom. It's free. It's fun. And, it's Foolish. 

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

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Stocks Mentioned

Monsanto Company Stock Quote
Monsanto Company
MON
Nutrien Stock Quote
Nutrien
POT
Deere & Company Stock Quote
Deere & Company
DE
$334.22 (-3.44%) $-11.91
The Mosaic Company Stock Quote
The Mosaic Company
MOS
$48.53 (-7.60%) $-3.99

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