Over the past two years, the price of key crops has been on a steady rise, due to adverse weather conditions, a decline of arable land and a rapidly growing global population. In short, demand for food is high while supply is low – a perfect environment for fertilizer producers such as Agrium (AGU: Charts, News, Offers) and bio-engineered seed manufacturers such as Monsanto (MON: Charts, News, Offers), which benefit from the farmer’s need to utilize ever acre of arable land to the fullest. Monsanto, which produces genetically modified, pesticide/herbicide-resistant corn and soybean seeds, is the most well-known and controversial of these companies.
While the company’s products are well-received by farmers, critics have accused the company of manufacturing unnatural “Frankenfoods” while bankrupting small-time farmers who have attempted to collect the company’s patented seeds after each harvest. To combat this problem, Monsanto introduced a genetically modified “self-destruct” seed to the market that was only good for one harvest. This led critics to claim that the company was “playing God.” Even though Monsanto posted a 77% increase in profit for the fiscal third quarter, the company revealed that it was being probed by U.S. regulators for customer incentives provided by its herbicide business.
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St.Louis-based Monsanto posted earnings of $1.26 per share, or $680 million, for the quarter ending on May 31, an increase of 70 cents per share a year earlier. Revenue increased 21% to $3.59 billion. Analysts had expected earnings of $1.10 on revenue of $3.36 billion. Gross margin increased from 46.8% to 54.5%. Monsanto expects full-year earnings between $2.84 to $2.88 per share for 2011, above the Street consensus of $2.72 to $2.82 per share. Its seed business was still the company’s heaviest item on its top line, with a 12% gain in revenue with a 25% increase in earnings. Monsanto’s agricultural productivity business, which includes its formerly best-selling glyphosate herbicide, forecasts a $700 million increase in gross profit in 2011 in its herbicide division, an increase from the $550 to $600 million it had previously estimated. For the current quarter, the segment’s sales increased by 57%.
Monsanto’s earnings mark a turnaround point for the company, which had been hit hard earlier this year. This was due to two main factors – the pricing of its new premium corn seed, SmartStax, was regarded as too costly by farmers, and its glyphosate herbicide business was crushed by generic competitors. These two businesses are intertwined and the heart of Monsanto’s business – selling herbicide resistant seeds to farmers with the herbicide itself as a combination package.
Monsanto has defended the company’s higher prices by claiming that higher corn prices justify more expensive seeds. In addition, with the seed-selling season wrapping up in the northern hemisphere, the company has stated that it has hit all its sales targets for its genetically modified corn and soy seeds for the year. While grain prices have taken a breather and weather conditions are expected to be better in 2011, Monsanto believes that the upward trend will continue. However, the company failed to disclose its competitive position against its primary rival Pioneer Hi-Bred, a subsidiary of DuPont (DD: Charts, News, Offers). This is troubling to Monsanto investors because Pioneer executives recently vowed to increase its market share in corn and soybeans for the third consecutive year.
Monsanto’s glyphosate herbicide business, which was devastated by Chinese generics, is now recovering due to a restructured, lower-cost, higher-margin approach. The glyphosate business is also being downsized in order for the company to focus more on its seeds business. The overuse of glyphosate has been criticized as increasing weed resistance in the southern United States, as weeds have adapted to the herbicide. The SEC is currently investigating customer incentive programs for its glyphosate herbicide, Roundup. Monsanto has stated that it could not comment on the ongoing probe.
Shares of Monsanto broke out over $70 this week, and currently trade with a forward P/E of 20.93.
Other News About MON
Monsanto posts $680 million profit in 3rd quarter
Monsanto posts strong earnings.
Monsanto CEO Sees Rescue in Latest Results
Monsanto sees a turnaround in its key businesses.
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Agrium’s Good News
Agrium stands to gain from rising grain prices.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
