MON Due for a Breather

Updated from 11:40 a.m. EST on Jan. 2.

As suspected, Monsanto (MON) exceeded expectations, reporting fully diluted first-quarter 2008 (ending November) EPS of 46 cents (up 188% vs. earnings for the same quarter last year/69% positive surprise vs. consensus) on revenue of $2.1 billion (up 36% vs. same quarter last year/15% positive surprise).

Sales growth was led by the corn seed (up 30%) and herbicide (up 54%) businesses. Latin American operations were particularly strong.

Unsurprisingly, management raised its 2008 forecast to between $2.50 and $2.60 per share. At $2.59, though, consensus estimates had already discounted the possibility.

Free cash flow 2008 expectations were also raised 12%, to come in between $900 million and $1 billion, further augmenting Monsanto's already strong solvency. Forecasts did not include a likely gain from sister company Solutia's emergence from bankruptcy protection, which could add 22 cents to 24 cents per share in the current quarter.

With a deep R&D pipeline -- including six $400 million blockbusters and a $1 billion mega blockbuster -- governments favoring ethanol and a global food shortage, Monsanto's earnings story remains strong and growing.

Monsanto shares gapped up 7% to a new all-time high at the open but fell back to a net 5% gain through the morning conference call. This is a most remarkable performance considering the stock's near-vertical second-half 2007 price performance.

Despite another truly outstanding quarterly earnings result, though, Monsanto shares are perched precariously above support, averaging 20% above level support and 36% above the top bands of prior uptrend price channels.

Today's pop also does little to alleviate the head-and-shoulders pattern forming amid deteriorating technical indicators and a 50%+ industry-relative premium valuation.

Monsanto remains overdue for a breather. Everything has its price. Buyers beware.

MON Preview: What Price Success?

Monsanto (MON - commentary - Cramer's Take) is scheduled to report first-quarter 2008 earnings (ending November) in a conference call at 9:30 a.m. EST on Thursday, Jan. 3. The current consensus estimate for fully diluted quarterly EPS is 35 cents (up 119% vs. earnings for the same quarter last year) on revenue of $1.87 billion (up 22% vs. same quarter last year).

While Monsanto's long-term record of positive surprises has been decelerating over the last year, current earnings estimates have rapidly increased over the last three months. The company will likely once again deliver the goods.

In the recent quarter (fourth quarter 2007 ending August), Monsanto posted a basically in-line quarter, with fully diluted EPS up 28% during a normal seasonal loss period on 13% revenue growth due mostly to corn. Nonetheless, management surprised investors with a downgrade of fiscal 2008 EPS expectations, which was odd considering simultaneous comments that first-quarter 2008 earnings should be better than expected on herbicide recovery.

In any event, management has since been more positive on U.S./global ag markets, and earnings expectations have risen accordingly. This week, investors will be watching for project updates -- including BASF, $400 million blockbusters and a $1 billion mega blockbuster -- and management plans to deploy ample excess cash.

While management comments restrained Monsanto shares' autumn performance, they have since roared back to all-time highs. The stock now once again sits significantly above price channels (25% to 40% above top bands). Moreover, shares sell 10% and 20% above near-term level support of $100 and $89.

The stock also happens to be forming a head-and-shoulders top (following a near-vertical second half 2007) while technicals (e.g., moving average convergence/divergence and relative strength posting lower highs, on-balance volume barely hanging on) are deteriorating.

Monsanto has great earnings, with 42% EPS growth over the next 12 months, but also sells at a 55% industry-relative premium. While it's hard to bail on such a great story, the stock is way overdue for a breather -- at a minimum.

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At the time of publication, White had no positions in the stocks mentioned.