Monsanto Company (MON) announced results for the third quarter of fiscal 2010. During the quarter, net income decreased to $384 million from $694 million in the same quarter of 2009.

EPS (excluding a restructuring expense) was 81 cents compared to $1.25 in the year-ago quarter. The decrease was due to a fall in revenues and gross margin. However, the reported EPS was a penny above the Zacks Consensus Estimate and the company’s expectations of 80 cents.

Revenues declined 6.3% to $2,962 million from $3,161 million during the same period in the previous year. The decrease in revenues was attributable to a fall in prices of glyphosate-based herbicides produced by Monsanto.

Revenues in the Seeds and Genomics segment increased 5.1%, while Roundup and other glyphosate-based herbicides segmental revenue almost halved to $269 million from $614 million. Revenues from all other agricultural productivity products grew 10.7% year over year to $331 million.

Gross margin decreased from 58.0% to 47.0% in the reported quarter due to a decrease in prices of glyphosate-based herbicides, particularly the Roundup brand. As a percentage of revenues, selling, general and administrative expenses (SG&A) and research & development (R&D) expenses increased by 100 basis points each.

At the end of the third quarter, free cash flow was negative $1.15 billion from a negative $145 million at the end of the third quarter of fiscal 2009. One reason for the decrease was the huge fall in net income.

Outlook

For the fourth quarter and fiscal 2010, management expects an EPS in the range of $(0.09)-$0.11 and $2.40-$2.60 respectively. For fiscal 2010, management expects free cash flow in the range of $400-$500 million.

Recently, the company completed its $200 million expansion outside New Orleans to increase production of the Roundup herbicide. This expansion will help boost the capacity of Roundup production by 20%. This is a huge project for Monsanto in scope and terms of financial investment.
 
We believe that the robust pipeline of new products and the continuous growth in the seeds and genomics segment along with strict cost control will help Monsanto grow in future. However, the intensely competitive environment and the decrease in product price force us to maintain our Neutral recommendation.
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