Monsanto's Profits Should Spike on Spring Seed Sales

The agribusiness giant has a solid cash flow base from which to grow.
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Agribusiness giant

Monsanto

(MON)

is steadily increasing its market share in seeds and making gains in the biotech area, two factors almost certain to take center stage during Wednesday's earnings call. In addition, firmer price and volume trends for its popular weedkiller Roundup should provide good news for the company.

Monsanto is reporting second-quarter results for fiscal 2006, which ends Aug. 31. This is typically the company's strongest quarter, since seed deliveries for the new planting season peak in February through March. Street estimates are $1.52 a share, which may be a bit high or a bit low. While not trying to hedge, it is difficult to split estimates of peak shipping season into two quarters.

Here are some trends to watch:

  • Seeds and genomics will account for approximately 55% of sales and over 70% of profits for the company. This profitability has expanded from 27% in fiscal 2001, and the trend, while slowing, is expected to continue.
  • Roundup sales will be key this quarter, as they were last quarter (when the company beat estimates by 2 cents). Gross profitability has been under pressure and should bottom out this year. Gains in volumes should begin to offset weaker pricing and higher raw-material costs.
  • Monsanto continues to gain market share in genetically modified corn seed in the U.S. and cotton seed in Argentina. In corn seed alone the firm could gain 100 basis points of market share.
  • Gross margins should increase overall to nearly 54%, although net margin may be down slightly because of higher R&D costs. Monsanto's primary advantage (and risk) is its ability to derive new products from extensive research spending. That trend is likely to continue.

Overall, for the full fiscal year, Monsanto has guided the Street to the high end of its $2.35 to $2.50 forecasted range. At the end of last quarter the company estimated that free cash flow for the year will reach $825 million to $900 million, a tidy sum.

As I noted in last quarter's earnings-call coverage, advances or setbacks in the product pipeline are the key for Monsanto shares. The firm continues to make excellent progress in genomics: phase I and phase II results show higher yields in corn and soybeans and phase III results are due soon for omega-3 soybeans.

Monsanto is seeing some benefit from its pricey acquisition of Seminis, though it remains to be seen whether the public will accept genetically modified food. This has weighed on the stock even as the company has grown. Nevertheless, Monsanto's strong free cash flow and focus on new products give it a solid base to grow.

Editor's Note: This column by Edward Stavetski is a special bonus for

TheStreet.com

and

RealMoney

readers. It appeared on

Street Insight

on April 4. To sign up for

Street Insight

, where you can read Stavetski's commentary in real time, please click here.

At the time of publication, Stavetski held no positions in Monsato.

Edward J. Stavetski founded Pembroke Capital Management in 2002. He is the chief investment officer and manages money for individuals, small business pensions and small foundations. PCM's investment style is large-cap and small-cap value. Before founding PCM, Stavetski was director of research for Pitcairn Trust Company, a family office and mutual fund company; chief investment officer and managing director of PNC Advisers, the investment management and trust division of PNC Bank and senior portfolio manager for Rorer Asset Management, an investment advisory firm managing individual and institutional portfolios. He graduated with a bachelor's degree from West Virginia University. He is a member of the Association for Investment Management & Research (AIMR) and the Financial Analysts of Philadelphia. He is also a board member of Financial Analysts of Philadelphia and serves as vice-chairman of AIMR's professional development committee.