NOTE: The following article by a financial analyst questions Monsanto's long-term strategy. It was written ahead of the announcement today of the company's 2nd quarter financial results. They trail estimates, with profits down 19%. Monsanto warns of not reaching targets and admits for the 1st time that it won't reach its goal of doubling profits by 2012. Its share price fell further (by around 3%) on very large pre-market trading.
For 2nd quarter financial results:
Bloomberg: http://www.businessweek.com/news/2010-04-07/monsanto-profit-falls-as-prices-for-roundup-decline-update1-.html
Monsanto: press release
http://monsanto.mediaroom.com/index.php?s=43&item=823
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Farmers May Force Monsanto Price Cut
Scott Eden
The Street, 6 April 2010
http://www.thestreet.com/story/10719079/1/farmers-may-force-monsanto-price-cut.html
NEW YORK - Arguably the most controversial company in the world will report earnings before Wednesday's opening bell, and analysts and investors will be looking to see what genetically-modified-seed creator Monsanto(MON) has to say about the ramp-up of several key new products this year and next.
Setting aside the allegations of antitrust behavior and price-gouging from regulators, rivals and customers -- and shelving for the moment the arguments claiming that Monsanto has a dangerously unilateral hold on the food supply -- the St. Louis company is expected to report per-share earnings of $1.73 for its fiscal second quarter, on revenue of $3.94 billion, according to a survey of sell-side analysts by Thomson Reuters.
A fair amount of bullish sentiment appears to have gathered around Monsanto (and agricultural stocks in general ), judging by call-option trading activity and the stock-price targets of Wall Street analysts, as Schaeffer Research, an options newsletter, pointed out on Monday. On average, analysts have pegged a 52-week top on Monsanto shares of more than $90.
And yet, despite these positive signals, the stock has done nothing since the start of the year, losing 19% of its value since touching $86.65 on Jan. 8, two sessions after Monsanto missed expectations with its fiscal first quarter results, as sales of its now-patent-less Roundup herbicide (the blockbuster product that eventually gave rise to the modern Monsanto) declined at a more rapid pace than analysts thought it would.
Focus now turns to the company's newest genetically tweaked corn and soybean seeds, called Smartstax and RoundUpReady2 Yield, respectively, which Monsanto officially launched in 2009 but has yet to scale up into full production and distribution. Corn and soybean-related products accounted for around 78% of the company's gross profit in 2009. As such, it's well understood that the two seeds will define Monsanto's relative success or lack thereof through fiscal 2012.
So it's interesting, then, that one analyst -- Don Carson, of UBS(UBS) -- trimmed his earnings estimates for the next three years (fiscal 2010, 2011 and 2012) based on his belief that Monsanto will be forced to reduce the prices of these products in a bid to entice farmers to buy them.
"According to our dealer surveys," Carson wrote in a research note sent to clients on Monday, "[Monsanto] has begun to heavily discount SmartStax in an effort to increase penetration" among reluctant buyers. Further, he wrote, "throughout the Corn Belt we have heard of many instances of [RoundUpReady 2] being sold without a premium when combined with a SmartStax order."
In effect, it appears that Monsanto overpriced its corn and soybean seeds, given the fact that both showed "less-than-stellar" yields, Carson wrote, during the 2009 growing season. Farmers, therefore, have been wary of paying up for a product that might not work as well as promised.
That view was seconded by a seed dealer in Illinois, who spoke to TheStreet only on condition of anonymity, for fear of retribution from Monsanto. The dealer said that, last year, many growers were eager to try the new RoundUpReady soybean seed based on the company's promise that the seed would yield three and a half to seven more bushels per acre than the version then in currency. Monsanto was also able to charge roughly $10 more per bag for the new seed.
"It looked like a no-brainer," the dealer said of Monsanto's marketing pitch and yield promises. "But that didn't follow through in many instances."
By the end of the 2009 harvest, the dealer went on, some growers "were very disappointed that there was basically no yield advantage with [the RoundUpReady2 soybean seeds], and sometimes there was a decrease."
Overall in 2009, corn seed prices increased 32%, while soybean seed prices rose 24%. Also last year, the Justice Department started investigating the seed business for possible anti-competitive behavior; most understood that Monsanto was the focus.
Observations that call into question the quality of Monsanto's genetically engineered seeds would seem to undercut the company's argument that its dominance in the industry stems from the simple fact that its seeds are better than the competition's.
Farmers tend to stock up on seeds during the winter months, in preparation for the spring planting season. This time around, skepticism reigned regarding not just Monsanto's RoundUpReady but also its new SmartStax corn seeds, especially since the company provided little in the way of third-party data to support its yield contentions. "They didn't really have any supportive data out there," the dealer said. "It was just kind of sold as it was better."
Monsanto wasn't immediately available for comment.
The reluctance on the part of growers appears to have induced discounts from Monsanto. The result, UBS's Don Carson argued, will be lower "absolute prices" for the company's seeds -- and reduced profit for Monsanto. He cut his 2010 earnings estimate by a nickel to $3.10, which is below the Thomson Reuters consensus target of $3.28. For 2011 and 2012 Carson sees Monsanto's per-share profit clocking in at $4.25 and $5.20, down from prior forecasts of $4.50 and $5.63. He also cut his price target on Monsanto stock to $89 from $94, but maintained his buy rating.
Monsanto itself has said it will earn between $3.10 and $3.30 a share (putting Carson at the low end of the range) in fiscal 2010. Since it issued that guidance last September, however, Monsanto has periodically gone public with various "reaffirmations" of its predictions, which may in retrospect appear like a type of protesting-too-much.
From a technical perspective, many traders have been looking for Monsanto's stock to break below $70 on heavy volumes, said Steven Spencer, a partner at the trading house SMB Capital in New York. "If that were to happen today before the earnings it would make for an interesting setup tomorrow," he wrote in an email Tuesday morning.
By midday, Monsanto shares appeared to be doing just that. At 12:13 p.m. Tuesday, the stock was changing hands at $69.74, down 70 cents from the previous close, on volume of more than 8 million shares. The average daily turnover in the name is about 6.2 million shares.
Spencer said that should Monsanto surprise with earnings to the upside, a short squeeze may develop. "Based on the recent price action it does not look like anyone is willing to commit to heavily selling it below this key level."
If, on the other hand, Monsanto's results disappoint investors, the stock could fall into the middle 60s, he said, as those long the stock "throw in the towel."
-- Written by Scott Eden in New York