Monsanto Company (MON) posted earnings per share of $1.87  from its ongoing business in the second quarter of fiscal 2011 compared with $1.70 in the year-earlier quarter, beating the Zacks Consensus Estimate of $1.84. The increase was attributed to revenue growth as well as increased operating margin.

During the quarter, net income was $1,017 million compared with $887 million in the year-earlier quarter.

Revenues were up 6% to $4,129 million from $3,890 million in the year-earlier quarter, ahead of the Zacks Consensus Estimate of $4,125 million. The growth in revenues was attributable to the growth in both the Seeds and Genomics and Agricultural Productivity segments.

On a segmental basis, the Seeds and Genomics segment grew 5% from the year-earlier quarter to $3,421 million, driven by increase across all platforms except soybean. Revenues from Agricultural Products segment were $708 million, representing an increase of 10.3% from the year-earlier quarter.

Gross margin increased 200 basis points from the year-earlier quarter to 56% in the reported quarter. Operating margin was 36% compared with 32.9% in the year-earlier quarter, led by higher gross margins and decline in selling, general and administrative expenses partially offset by increased research & development expenses.

At the end of the second quarter of fiscal 2011, net cash from operating activities were $1,441 million compared $256 million at the end of the corresponding quarter of the previous year. Free cash flow was $917 million compared with a negative $89 million at the end of the second quarter of fiscal 2010.

Outlook

The company believes that mid-teens earnings growth for fiscal 2011 is on track and Monsanto reiterated its 2011 EPS expectation of $2.72–$2.82.

For fiscal 2011, management expects free cash flows in the range of $900–$1,100 million, up from the previous range of $800- $900 million, attributed to superior working-capital management and favorable economic climate in agriculture.

We are positive on Monsanto based on improved visibility of the yield performance of its SmartStax corn seed which enhances our long-term perspective on the stock. However, 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 #2 Rank (short-term Buy rating).

 
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