Monsanto Co. (MON, Financial) is slated to report its second-quarter results for fiscal 2015 on April 1, 2015. The company’s products, designed to support better crop yield, find strong demand in the market where the gap between supply and demand of food is constantly widening due to the increasing global population. However, Monsanto’s quarterly results are prone to the impact of cyclical fluctuations in the farming industry, owing to weather volatilities. The company competes with businesses such as BASF (BAS, Financial), Syngenta (SYG, Financial) and the privately held Bayer CropScience in the Agriculture Technology and Chemicals marketplace.
Monsanto has reported estimate-beating earnings over the last four quarters. For Q1 2015, the company logged adjusted earnings of 47 cents a share compared to the consensus estimate of 34 cents a share. However, the earnings also represented a 29.9% year-over-year decline compared to the company’s adjusted EPS of 67 cents in Q1 2014. Revenues also fell 8.7% from the prior-year levels to $2870 million for the first quarter, falling short of the consensus estimate of $2956 million. Following the results, Monsanto reiterated its guidance of EPS in the $5.75-$6.00 a share range for fiscal 2015, while for the second quarter, the company projected a 5%-10% year-over-year decline in EPS owing to lower corn-acres in the U.S. Moreover, Monsanto also declared a dividend of 49 cents a share for the second quarter of fiscal 2015, in line with its policy to reward investors. Shares of the company have dipped over 3% since the last earnings report.
Superior soya yield likely to boost revenues
With corn being arguably the key crop for Monsanto’s business, the biggest drag on the company’s earnings for the second quarter is likely to come from the current slowdown in the corn market. While the USDA’s recent report indicated a 4% decline in corn acreage during the last year, the company’s Q1 earnings were also showed significant weakness in Monsanto’s corn business, with a 12% year-over-year fall in sales of corn seeds accounting to a 30% year-over-year decline in its first-quarter earnings.
However, Monsanto’s soyabean business saw considerable growth during the quarter with experts forecasting that U.S. farms will plant a second successive record-breaking amount of soyabeans this spring. Experts also foresee the USDA projecting a 3% growth in soyabean acreage for 2015, following an equally impressive growth during the last year. Consequently, Monsanto is likely to see higher revenues from its Seeds and Genomics division for the second quarter. Sales of Monsanto’s soyabeans is expected to grow on the back of higher U.S. yields, benefits reaped from the launch of Intacta in Argentina and Brazil and higher royalties from Dupont.
Concurrently, Monsanto also expects growth in its cotton business on the back of the its highly effective Bollgard II XtendFlex weed controlling system for the cotton crop. Moreover, declining oil and gas prices have resulted in lowered operating costs for Monsanto, significantly driving up margins.
On the downside, Monsanto’s reputation has been in the line of fire, with recent WHO findings indicating that one of the key components of the company’s Roundup weed killer could be potentially carcinogenic. Although Monsanto denied the charges, the company’s image in the market has taken a beating. At the same time, Monsanto was also fined a sum of $600,000 by the EPA for hiding the leakage of dangerous chemicals at its Idaho facility. Although these do not directly affect the company’s market performance, public perception is likely to impact Monsanto’s business decisions in the long run.
Final thoughts
Monsanto’s shares have declined over 10% in the last six weeks, primarily owing to the sluggish corn market. Although near-term seasonal headwinds are inherent to the company’s business, investors are concerned about Monsanto’s projected 5%-10% year-over-year earnings decline. While the company posted EPS of $3.15 on revenues of $5.83 billion in Q2 2014, consensus estimates peg the figures for Q2 2015 at $2.96 a share on revenues of $5.58 billion. Currency headwinds and pricing competition also remain a cause for concern. However, a superior soyabean yield is likely to push the company’s revenues and offset the impact of the soft corn market. Monsanto shares have mostly traded in the $111-$122 range in the last three months, peaking to $125.75 in February 2015. The Monsanto stock carries a price estimate of $112.74 a share and a "buy" guidance.
