Monsanto Beats Earnings, Revenue Inches Up

Monsanto Company (MON) announced better-than-expected results for the first quarter of fiscal 2011. During the quarter, net income was $6 million compared with a loss of $19 million in the corresponding quarter of 2010.

Earnings per share (EPS) (excluding a restructuring expense) were 2 cents compared with a loss per share of 2 cents in the year-ago quarter. It surpassed the Zacks Consensus Estimate by a penny per share.The increase was due to higher revenue and lower operating costs.

Revenues inched up 7.8% to $1,830 million from $1,697 million during the same period in the previous year. However, the Zacks Consensus Estimate was $1,779.0 million. The growth in revenues was attributable to a 12.8% increase in revenues from Seeds and Genomics segment, which contributed approximately 64% of total revenue in the first quarter of fiscal 2011.

Seeds and Genomics' revenue growth is driven by higher yield performance of SmartStax corn seed and RR2Y soybean seed.

Roundup and other glyphosate-based herbicides revenues rose 2.8% to $523 million from $509 million in the first quarter of fiscal 2010. However, revenues from all other agricultural products fell to $144 million, representing a decrease of 8.3% year over year.

Gross margin increased by 120 basis points to reach 44.7% in the reported quarter. Selling, general and administrative expenses (SG&A) dropped by 460 basis points, but Research & Development (R&D) grew by 90 basis points. However, Monsanto reported an operating income of $58 million from an operating loss of $38 million in the first quarter of fiscal 2010.

At the end of the first quarter of fiscal 2010, net cash by operating activities was $624 million compared with a negative operating cash flow of $1.4 billion at the end of the corresponding quarter of the previous year. Free cash flow was negative $500 million from a negative $1.6 billion at the end of the first quarter of fiscal 2010.

Outlook
We are optimistic on Monsanto based on the improved visibility on the yield performance of its SmartStax corn seed and RR2Y soybean seed in the coming years. SmartStax and RR2Y posted a decent yield on completion of its 95% harvest in fiscal 2010, which enhances our long-term perspective on the stock.

Although the agricultural productivity segment has encountered significant market changes last year, the company’s pipeline of agricultural biotechnology products stands unmatched in the industry.

For fiscal 2011, management expects EPS in the range of $2.72–$2.82 and anticipates free cash flows in the range of $800–$900 million.

However, we are concerned about the decrease in the prices of Roundup herbicides, which forced fiscal 2010 EPS to reach $2.41, almost halved from $4.41 in fiscal 2009. Further, an intensely competitive environment posts additional challenges for the company.

Monsanto competes head-to-head with Syngenta AG (SYT). We maintain our Neutral recommendation on the stock. The stock at present retains its Zacks #3 Rank (short-term Hold rating).