One disadvantage of the high profile that surging corn prices have created for agriculture companies is that investor expectations get ahead of themselves. One good example: Monsanto (MON), which posted better-than-expected results but saw its shares fall on June 25.
Corn seed and bio-genetic traits have been big drivers of the company's profits in recent years. On June 25 the manufacturer of seeds and herbicides reported a 41% jump in earnings, to $1.45 a share, for its third quarter, ended May 31, from $1.02 a share a year ago, thanks to a 26% rise in total sales.
A settlement of legal claims related to former subsidiary Solutia's emergence from bankruptcy contributed 23¢ aftertax to the $3.93 a share that Monsanto earned in the first nine months of fiscal 2008, an 81% jump from the year-ago period. On a continuing basis, earnings for the first nine months of fiscal 2008 were $3.70 a share.
Earnings Beat Forecasts
The St. Louis outfit sees reported earnings of $3.63 for the full fiscal year, excluding an estimate for the in-process research and development charge associated with acquisitions in the fourth quarter. Monsanto boosted its forecast for continuing earnings to $3.40 from a prior range of $3.15 to $3.25 a share.
Roundup and other glyphosates—herbicides used to kill weeds that choke the growth of crops—were the key driver of the earnings upside, while gross profit from cottonseed was also much higher, at $195 million.
The latest results beat Wall Street analysts' average forecast of $1.34 a share, but that wasn't enough to keep the stock in investors' good graces. The shares closed 3.1% lower at 131.52 on June 25, though they are still up nearly 18% year-to-date.
Investors may have been disheartened by lower margins in earnings before interest and taxes in the seed business, which fell from 33% to 29%, partly because of an increase in spending on research and development.
Seeds of Distress
Margins were hurt by an increase in seeds in the product mix, greater volatility in commodity prices that put pressure on soybean margins, and resolution of patent litigation and royalty disputes, which had a one-time effect of reducing corn margins by $12 million, or 1%, CFO Terrell K. Crews said on a June 26 conference call with investors and analysts.
Monsanto slashed its estimate for free cash flow for the fiscal year to $550 million from the previous forecast of $1.3 billion, mostly on higher acquisition-related expenses.