Monsanto Company (MON) reported a loss of 2 cents per share for their fiscal first quarter, while analysts had expected the world’s largest seed producer to break even. The biggest challenge for Monsanto came from generic competition to their chemical weed killer RoundUp, whose patent recently expired. Sales of RoundUp fell 89% from a year ago, which creates a problem for the company’s largest revenue generating product out of their chemical division. Glyphosate, RoundUp’s active ingredient developed in Monstanto’s labs, has dropped in price considerably with the entry of generic competitors. Monsanto has scaled down the division as it will obviously become less profitable at these prices. Of course, analysts have known that the patent was set to expire, but may have underestimated the toll that this would take on the chemicals division that overall had been responsible for as much as 30%-40% of gross profits.
As the company matures without as much assistance from RoundUp, they will necessarily fall back on their bread and butter of seeds and genetic engineering in an effort to increase crop yields worldwide. The seed business also struggled in the quarter with gross profit down $597 million or 88% from a year ago. While there were gains in cotton and vegetable seeds,
Monsanto was hurt by both corn and soybean sales slumps. Monsanto offered a range of explanations for the weak performance from droughts in South America to delayed harvests in the U.S. Despite the poor sales of corn and soybeans, management said they are still on track to reach their goal of at least 8 million acres of Roundup Ready 2 Yield soybeans and more than 4 million acres of SmartStax corn seed. Both products have been engineered to delivery higher production per acre by better resistance to herbicides.
Despite the weaker than expected quarter, we do not anticipate a downgrade of Monsanto forthcoming. We currently have a Fairly Valued rating on its shares, because the price is not out our line with the fundamentals. For example, for Monsanto historically the market has been willing to pay 14.9x to 28.1x times cash earnings per share, but the current valuation metric is on the low end of that historical range at 16.8x. It’s a similar story for price-to-sales which is currently 3.8x and fits reasonably within the historically normal range of 2.7x to 5.3x.
The company reaffirmed its profit per share guidance for the full year as $3.10 to $3.30, which was a little less bullish than what the analysts called for $3.29. Monsanto is certainly not the cheapest stock in the market with a P/E over 26, and would need to drop into the low $70s before we think value investors will become interested. We are concerned that the loss of sales and profits from RoundUp will hurt the company going forward, but in many ways Monsanto resembles a biotech company and its R&D teams are hard at work finding the next blockbuster agro-chemical.
