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Can Monsanto Hold its Momentum with 2Q Earnings?

Stocks in this article: MON

What's not to like? I get it -- the stock is not cheap when compared to DuPont and Syngenta. But it's not as if the valuation is undeserved, especially given a recent 7% improvement in operating margin, which (by the way) is twice that of DuPont and 7 percentage points better than Syngenta. Let's have some perspective.

Expectations for the Second Quarter

After a dominant Q1 performance, I suppose you can say Monsanto has its own tough act to follow. The company will report second-quarter earnings on Wednesday and the Street is eager to see if management can carry the strong momentum from Q1. Analysts are expecting $2.56 in earnings per share on revenue of $5.27 billion, which, relative to Q1's performance seems a bit soft.

It's worth noting here that in the year-ago quarter; Monsanto posted a net income of $1.21 billion, or $2.24 per share on revenue of $4.75 billion. Essentially, the Street is looking for 11% year-over-year revenue growth and 14% growth in earnings.

Considering that Q1 revenue arrived up 21% -- beating estimates by more than 10% -- a similar performance could push revenue in the high range of $5.8 billion to $6 billion. Investors shouldn't be surprised by an "upside surprise." And for the momentum to truly continue, management has to deliver the goods on the high end to shut the bears up for good.

The Street will also be paying attention to what management says about the $1.7 billion royalty payments Monsanto won from DuPont. The two companies reached a settlement last month in what has been an on-going patent lawsuit over technology used in genetically modified soybean and corn seeds.

DuPont agreed to pay more than $1.7 billion for the next decade for soybeans that are resistant to Roundup weed killer, which is manufactured by Monsanto. This is important because it will impact Monsanto's long-term earnings (2014 to 2017) by as much as 30 cents per share according to analysts.

Bottom Line

I'm always hesitant to recommend a stock that is sitting at (or near) its 52-week high. However, Monsanto is in an interesting situation. While growth is not an issue for this company, this is not a typical "tech-type" play, either. That is to say, Monsanto is more of a long-term investment /> . As such, the stock being at a 52-week high is not a concern.

While it's also true that the stock is not cheap at a P/E of 25, Monsanto is also trading at just 20-times forward fiscal 2014 earnings. And given that royalty payments from DuPont will start kicking in, which raises EPS by as much as 30 cents a share, patient investors can still do very well with Monsanto.

At the time of publication, the author held no position in any of the stocks mentioned.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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