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.