1 Stock Ready to Crush Street Estimates Next Week
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If you are expecting big things from Monsanto’s (NYSE: MON) earnings release next week, prepare yourself for an unpleasant time. Analysts are expecting the seed king to report nearly double the losses per share it suffered in the year-ago quarter on a flat top line. My expectations don’t differ much, though I have a hunch that Monsanto will continue its streak of beating Street estimates.
That’s not to say I am expecting its bottom line to be in the black. The period between June to September is typically weak for agriculture companies as they leave the U.S. planting season behind, so low sales growth and margins are inescapable. Which explains why rival DuPont (NYSE: DD) too is expecting ‘larger seasonal losses’ for its agriculture business during the second half of the year. Only, I feel Monsanto’s losses might not be as big as what most analysts are expecting (a loss per share of 43 cents), and its top line could show some growth. What’s behind my optimism? It’s just one market that is bearing the burden of hopes – Latin America, as it steps into its peak planting season.
To gauge how critical demand from the nation is as a sales-growth-driver for the latter part of the year, a perfect example would be that of Syngenta (NYSE: SYT). It derived more than a quarter of its total sales in 2011 from Latin America, of which a whopping 70% came during the second half alone. Obviously, like peers, the company is banking heavily on the market to boost revenue in the forthcoming months. And it’s not just the seed companies looking to the south for support. Take a look at what fertilizer players are banking on. And why not, this market has proved to be a key growth driver in recent years for most companies. So much so, that Monsanto today derives nearly a third of its total international revenue (which in turn is half of total sales) from Brazil alone.
If Latin America played a critical role in boosting Monsanto’s third-quarter top line, it is likely to do so in its fourth quarter as well helping the seed giant top its revenue growth vis-à-vis last year. My only concern is that revenue growth could be dampened if farmers in Latin America shift focus to soybeans from corn – chances of which are high given the more than 40% surge in soybean futures prices this year. Brazil is anyway bracing for a record soybean crop year. Record crop prices, shortage of U.S. soybean due to the drought and rising demand from top consumer nations like China – incentives for Latin American growers to plant every corner of their land couldn’t be any better.
DuPont isn’t ruling out the possibility of such shift. Nor is fertilizer maker Agrium (NYSE: AGU), which thinks firm soybean prices in recent months as a result of tight demand and supply balance is a huge incentive for Brazilian farmers to increase soybean plantations area this year. Agrium has strong presence in South America, operating more than 50 facilities from this nation.
But a shift to soybean isn’t exactly good news for Monsanto because while corn seed and traits account for more than half of its total sales, soybean seed and traits contribute less than 20% to its top line. DuPont clearly mentioned in its last earnings call how a shift from corn-to-soybean could hurt its sales growth. But both these companies seem to have recognized the gap they need to cover in the soybean area, which is why their pipelines have the crop in focus. If DuPont is readying its pest-resistant soybean varieties for launch in Brazil by 2014 apart from other target products, Monsanto’s insect-resistant soybean Intacta RR2 PRO is already undergoing trials in Brazil, and is likely to go on sale soon. Anyway, even if farmers plant soybeans more, the impact on sales won’t really be visible before the next quarter. That’s because soybean plantations in Brazil usually peak after October. For its fourth quarter, Monsanto and DuPont can bank on corn.
Beating rats and rants
As much as its focus will be on numbers, Monsanto is likely to devote time on updating investors about its take on scientific papers that are alleging its genetically modified corn to be responsible for health hazards as fatal as cancer. While French health experts are digging deeper into it, Russia has just displayed its concerns by suspending imports of Monsanto’s corn, even if temporarily. Monsanto has already killed bugs and rootworms earlier, only, it’s rats this time! Whatever be the case, such news is not going to affect the numbers Monsanto reports next week, or its outlook. The company has an edge, made clear when it recently won a $1 billion suit over DuPont after the latter was found guilty of unlawfully mixing Monsanto’s Roundup Ready trait with its own. DuPont is appealing against the verdict, but the ball seems to be in Monsanto's court.
Monsanto looks set to meet its full-year guidance of earnings per share of $3.65 to $3.70, which, even at its lower end, would mean a nice upside of 20% from 2011. An earnings beat is all its shares need to maintain the momentum, and I continue to remain bullish on Monsanto, irrespective of how it fares in its fourth quarter. To track the stock as it keeps moving up, click here to add Monsanto to your personalized stock watchlist.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.