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Soybean Driving Monsanto's Profits, Has 11% Upside

April 11, 2014 | About:

Amid the heated debate over the use of genetically modified ingredients, Monsanto (MON) has released its quarterly results that came in well above the analysts’ estimates.

The company has reported double digit profit growth as it continues to enjoy strong demand of corn and soybean. The highlight of the current quarter was the soybean business, its fastest growing segment, which has become as profitable as corn business. The company has forecast earnings growth of at least 10% in the current year. Analysts, on the other hand, are expecting 15% growth.

Following the strong quarterly results, analysts at JPMorgan have upgraded Monsanto to overweight and have increased the price target from $115 to $125. The company’s shares are currently hovering around $112.30. JPMorgan’s price target represents a potential upside of 11%.

Quarterly Results

In the second quarter, Monsanto’s profits climbed 12.6% year-over-year to $1.67 billion, or $3.15 per share, while net sales increased 6.6% to $5.83 billion. This was better than analysts’ expectations of a profit of $3.07 per share from revenues of $5.8 billion. The growth was largely driven by expansion the of worldwide corn and soybean businesses.

Monsanto’s gross profit margin improved from 56% in the same quarter last year to 59% for second quarter fiscal 2014.

Segment Wise Net Sales

2Q13

2Q14

% Change

(In Million)

(In Million)

Corn seed and traits

$3,280

$3,414

4.10%

Soybean seed and traits

$677

$820

21.10%

Cotton seed and traits

$60

$49

-18.30%

Vegetable seeds

$199

$219

10.10%

All other crops seeds and traits

$130

$146

12.30%

Agricultural productivity

$1,126

$1,184

5.20%

Corn Business

The biggest contribution came from the corn seeds business, whose gross margins expanded by 2.5 percentage points to 65.99%. The corn business benefited from the growth in Eastern Europe and Latin America.

For the current year, the U.S. Departmentof Agriculture has forecast a 4% decline in farm used for corn to 91.7 million acres. But Monsanto isn’t worried as it is anticipating record sales volume in its worldwide corn business, partly due to the growth in Eastern Europe. Although Eastern Europe is a smaller market as compared to the U.S., with around 30 million acres of land devoted to corn, Monsanto has achieved triple-digit growth in the region over the last couple of years.

Moreover, the expected increase in population and income around the world will fuel the growth of Monsanto’s global corn business over the coming years.

Robust Soybean Business

In the previous quarter, the soybean was the fastest growing business. Some of this growth was driven by the high demand of the Intacta products from large scale farm operations in Brazil.

During the quarter, Monsanto rolled out higher volumes of high-tech soybeans seeds to capitalize on the increasing demand of oilseeds. The 40% drop in corn prices in 2013 has made soybean more lucrative.

The soybeans segment reported an impressive 36.5% growth in gross profits from last year to $539 million. The oilseed’s margins have expanded by 7.4 percentage points in the quarter to 65.7%, easily outperforming corn.

Due to this strong growth, soybean has become as profitable as the corn business.

Therefore, even if Monsanto witnesses a slowdown in corn, its bottom line could continue to grow on the back of higher soybean sales.

Soybean has bright prospects for the long term. In terms of value, soybean is second biggest crop after corn in the U.S. The U.S. Department of Agriculture has projected a record crop on 81.5 million acres this year. Moreover, farmers in Brazil and Argentina have also increased their soybeans planting for current season.

This growth momentum will likely continue in the coming years. As per Monsanto’s forecast, the company’s soybean net-sales could grow by $1 billion over the next five years.

Market Outlook

The global seeds market has been growing at a compounded annual growth rate (CAGR) of 12.1% for the five years ending 2018 to $85.2 billion. Both soybean and corn will grow at a CAGR of 12.5% each.

Forr 2014, Monsanto has forecast earnings of between $5.00 and $5.20 per share and free cash flows of between $600 million and $800 million. Analysts, on other hand, are expecting a profit of $5.24 per share from revenues of $15.89 billion, as per data compiled by Thomson Reuters.

If Monsanto manages to touch the low end of its estimate, then it would report earnings growth of nearly 10%.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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