Missouri-based agricultural company, Monsanto Company (MON) is scheduled to report its fourth quarter and fiscal 2010 results on October 6, 2010. The current Zacks Consensus Estimate for the fourth quarter is a loss of 6 cents a share.
Third Quarter Summary
On June 30, Monsanto announced its results for the third quarter of fiscal 2010. During the quarter, net income decreased to $384 million from $694 million in the corresponding quarter of 2009.
EPS (excluding a restructuring expense) was $0.81 compared with $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 $0.80.
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.
Fourth Quarter and Fiscal 2010 Outlook
For the fourth quarter and fiscal 2010, management expects EPS in the range of $(0.09) – $0.11 and $2.40 – $2.60, respectively and for fiscal 2010, free cash flows are expected to be in the range of $400 – $500 million.
The Zacks Consensus Estimates for the fourth quarter and fiscal 2010 remained at a loss of 6 cents per share and earnings of $2.44 per share, well within management’s guidance. Revenues are expected at $1,781 million and $10,457 million, respectively.
The Zacks Consensus Estimate fell in the last 30 days based on management’s guidance being trimmed on August 31, 2010. For the fourth quarter of fiscal 2010, out of 13 analysts covering the stock, 3 analysts moved downward and for fiscal 2010, out of fourteen analysts only one reduced its estimate with none increasing the same.
With respect to earnings surprises, Monsanto had a positive track record in the preceding three quarters. In the last four quarters, it recorded positive surprises in three quarters and a negative surprise in only one quarter. However, the magnitude of the negative surprise was much higher than the sum of the positive surprise in the three quarters. Thus, the average earnings surprise was a negative of 49.09% over the last four quarters, meaning that the company has been beaten by the Zacks Consensus Estimate by that measure.
Our Recommendation
We are optimistic on the higher production of SmartStax corn seeds because firstly it is expected to significantly enhance the top-line results and secondly, Monsanto is expected record a higher profit margin based on economies of scale. Moreover, the company’s pipeline of agricultural biotechnology products stands unmatched in the industry. Further, robust pipeline of new products and continuous growth in the seeds and genomics segment appears encouraging.
However, an intensely competitive environment and Monsanto’s huge dependence on a few large customers is not without risk. Monsanto also faces foreign currency risk since a significant portion of its income comes from outside the U.S. However, robust pipeline of new products and continuous growth in the seeds and genomics segment appears encouraging. We reiterate our long-term Neutral recommendation on the stock. The stock also currently retains its short term “Hold” rating (Zacks #3 rank).
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