With shares of Monsanto (NYSE: $MON) back up near a 52-week high, it certainly looks as if the Street’s on-again off-again romance with the agriculture giant is back on again. But how long will it last this time? This company is never far from controversy.
When Monsanto is not being vilified for what many believe to be unfair pricing tactics, the company is being attacked for its genetically modified seeds, which have raised health concerns among consumers. This is even though the Food and Drug Administration and other agricultural bodies have certified these seeds as being healthy to eat.
Nevertheless, these issues have not swayed investors from appreciating that Monsanto remains a solid play on the anticipated rise in global food demand. But these shares, which have been up by close to 13% over the past three months, are far from cheap. And with the first-quarter report due out Wednesday, investors will be looking for confirmation that they’ve planted their faith in the right company.
The Street will be looking for 64 cents in earnings per share on revenue of $3.08 billion, which would represent year-over-year revenue growth of 4.7%. This is while profits are expected to grow year over year by a mere 3%. Will this be enough to drive this stock higher, given that shares are already expensive relative to rivals DuPont (NYSE: $DD) and Syngenta (NYSE: $SYT)?
Let’s not forget, not only did Monsanto report a worse-than-expected loss for its fiscal fourth quarter in October, but management also issued weaker-than-expected guidance for this current quarter. So investors should ease into Wednesday’s report with some understanding that the numbers are not expected to particularly robust. But Monsanto has always been about more than the numbers.
For instance, even with its 1.5% decline in overall revenue back in October, the company still managed to doubled revenue for cotton seeds to more than to $65 million. Meanwhile the agriculture business posted another strong double-digit gain, jumping close to 14% year over year. This was during what is typically a seasonally weak period for the company.
On Wednesday investors should pay special attention to the details management shares regarding the company’s segmental performances. More specifically, can Monsanto accelerate growth in areas like corn, while at the same time fixing weak areas like soybeans?
I believe the federal government’s plan to eliminate restrictions on corn and soybean seeds that are genetically engineered to resist a common weed killer will help not only farmers, but companies like Monsanto. There were concerns that the herbicide known as 2,4-D will eventually becomes toxic to the plants early in their growth.
However, the U.S. Department of Agriculture’s plant-inspection agency found sufficient evidence to determine that it was a risk worth taking and considers 2,4-D to be safe. A final decision on the matter will be made by the spring or early summer. And it will consider the views and opinions of what the public has to say about the report.
For now, though, given Monsanto’s involvement in both pesticides and seed production, there should be some long-term benefits should the report and verdict be upheld.
Mother Nature — in this case, weeds — continues to impact the company’s performance. That has happened before. In 2012, a drought adversely impacted the soil in several parts of the United States, and caused severe damage to the company’s seed business.
But with last year’s $930 million deal for Climate Corp., which specializes in agricultural analytics, weather monitoring tools and risk management, I don’t expect Monsanto to have any weather-related hiccups going forward. This deal should help Monsanto become less reliant on the herbicide segment for the bulk of its revenue.
Essentially, despite Monsanto’s recent successes, this company is far from realizing its full potential. Accordingly, I don’t believe investors should judge Monsanto on a quarter-by-quarter basis, at least not to the extent of, say, hardware or software companies. As with its seeds, this is still a long-term growth company with a strong pipeline and untapped opportunities in areas like Europe, Latin America and Asia.