I had very modest expectations for Monsanto (NYSE: MON) this quarter, and that is basically what they delivered. Revenue was soft (by about $200M), as seed performance was exceptionally mediocre (up about 5%) and chemical sales fell off a cliff (down 34% in total). The further you go down the earnings statement, the worse it gets - lower revenue led to lower margins, and slightly higher operating expenses combined with those lower margins to really smack earnings.
Looking through the details, cotton was really strong, soy was just slightly positive, and corn didn't do very well. Perhaps playing into that performance, I saw the USDA report today that showed lower planted corn acreage than originally expected.
Monsanto is smack in the middle of a painful adjustment process. Round-up has pretty much had its run and the company is going to have to cycle through tough comparisons as that goes away. On top of that, there are concerns that the company's seeds haven't delivered the yields originally promised, while competitors like DuPont (NYSE: DD) and Syngenta (NYSE: SYT) seem to be getting a second wind.
The good news, and the reason I'm hanging on, is that Monsanto still has the best pipeline in the business. As time goes on, it's a simple fact that there will be increasing crop demand but decreasing factors of production (land, water, nutrients, etc.). Ultimately, then, I'm betting that better science ultimately leads to better growth.
In the meantime, I can't really encourage anybody to take the leap with me. I bought the stock way too soon and paid heavily for the mistake. Still, if you don't mind having to wait for a few quarters, it is definitely a prime example of a beaten-down former winner with a very good chance of rising once again. I put a fair value of about $70 - $75 on these shares right now.
Disclosure: I own MON shares.
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