We reaffirmed our long-term Neutral recommendation on Monsanto Company (MON - Analyst Report) on Apr 10, 2013, as risk reward remains fairly balanced for the stock at this juncture.
Why the reiteration?
Monsanto’s earnings per share of $2.73 in fiscal second quarter of 2013, reported on Apr 4, beat the Zacks Consensus Estimate of $2.55 by 7.1%. The company’s earnings also improved 19.7% year over year.
Monsanto generated revenues of $5.5 billion in the fiscal quarter, an increase of 15.2%, driven by an improvement in its global corn business. The revenues also surpassed the Zacks Consensus Estimate of $5.3 billion by 2.8%.
Since the announcement of the results, most of the estimates have moved upwards for fiscal 2013 and 2014. The current consensus estimate for fiscal 2013 rests at $4.57, an increase of 0.43% over the last 30 days. For fiscal 2014, the current estimate increased 1.73% to $5.27 per share, over the same time frame.
Monsanto expects its corn business to continue expanding in the coming quarters as well, especially in Brazil and Argentina. Moreover, management is optimistic about the U.S. seed business on the back of its fiscal second quarter performance and expects fiscal 2013 to be one of the highest revenue earning years for the company.
Its new multi year licensing deal with E. I. du Pont de Nemours and Company (DD - Analyst Report) and the acquisitions of private firms, Agradis Inc. and Rosetta Green are expected to help accelerate earnings growth in the coming quarters.
Monsanto, however, operates in an industry which is chiefly characterized by strong competition; this in turn forces Monsanto to come up with high yielding varieties over time. The attempt to do so calls for a rise in the cost of production. Moreover, the company’s third party dependence for seeds supply may raise operational uncertainty.
Moreover, the increased societal/government resistance to genetically modified crops and farmers’ reluctance to accept new products remain the major offsetting factors.
Other Stocks to Consider
Monsanto currently carries a Zacks Rank #2 (Buy). Other stocks worth a look in the agricultural chemicals industry are CVR Partners LP (UAN - Analyst Report) and The Andersons Inc. (ANDE - Analyst Report); carrying a Zacks Rank #1 (Strong Buy) and a Zacks Rank #2 (Buy), respectively.