Why This Stock Is Poised to Hit a New High Next Week

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s been a matter of days since Monsanto’s (NYSE: MON) stock hit a new high. The seed giant’s top and bottom line growth last year were far better than that of its peers, and the company also sports solid financials.

The already bullish markets might just get another reason to pump Monsanto’s shares up even further next week when the company turns up with its second-quarter numbers. Analysts are looking at 13% higher earnings per share on 11.5% increased revenue. I am not ruling out a beat from a company that has had a fairly good history of earnings surprise.

It’s a critical quarter

In front of the 21% and 169% jump that Monsanto reported in its revenue and net profit, respectively, in its first quarter the Street’s expectations appear pretty muted. Especially since Monsanto’s second quarter coincides with one of its most critical selling seasons, and it had already made a good start in the first quarter.

The period from December to February, which also represents Monsanto’s second quarter, is when farmers in the U.S. buy seeds in preparation of the upcoming spring planting season. Monsanto wasn't the only one that reported heavier pre-spring orders this year--peers DuPont (NYSE: DD) and Agrium (NYSE: AGU) confirmed it as well. Agrium, which derived more than half its sales from seeds and crop nutrient and protection products last year, reported a 10% increase in seed bookings year to date.  It also expects higher product prices this year, which should push up revenue further. Revenue from its North American seed business grew 16% in 2011 and 11% in 2012.

Industry farm reports are equally inspiring. According to a recent Farm Futures survey, farmers in the U.S. are looking at record corn as well as soybean planting this spring. News from Reuters also suggests that in some key crop growing areas like Louisiana and Texas, corn seeding is well above last year’s level. After the ravaging drought last year, this was expected.

When a dry spell can be good

The drought, in fact, is one reason why Monsanto’s sales could have gone up in the second quarter. It gives a bigger opportunity to the company to promote its hybrids and incentivize farmers to be on the safe side by opting for products that can withstand extreme temperatures. In fact, this race is already at its peak.

Apart from fungicides targeting the U.S. planting season, DuPont has lined up 44 Optimum AQUAMax hybrids for the U.S. this year in a bid to double their penetration of the market. A report on Agweb.com even suggests that DuPont’s corn and soybean seeds were planted across a larger number of acres than Monsanto’s in 2010 and 2011. Half of DuPont’s research and development expenditure in 2012 went towards its agriculture business, which in turn emerged as its biggest and top performing units with nearly 30% contribution to total sales.

Likewise, though agricultural sciences made up just 11% of Dow Chemical’s (NYSE: DOW) total sales last year, it was the only segment where sales grew 13% to hit a record when other businesses failed to deliver. It helped Dow’s share in the U.S. corn market to hit 8%. Little wonder that agriculture is featured among Dow’s priority businesses for this year and beyond. Its targeted 2013 spring launch of Enlist herbicide has been delayed by a year on protests, but its multiple-crop insecticide Sulfoxaflor should be on schedule for launch this year following recent proposals by the U.S. Environmental Protection Agency.

Comparatively, Syngenta (NYSE: SYT) is a pure and thus bigger agriculture play that generated 23% of revenue from seeds, and the rest from crop protection products in 2012. It is banking big on its Agrisure Artesian corn hybrids this year, targeting 400,000 acres, up sharply from 15,000 acres last year. Last month, it also won the USDA’s approval for the Agrisure Duracade protein that controls corn rootworm.

Naturally, as a company that holds the number 1 position in the global seed market, Monsanto can’t lag behind. It is leaving no stone unturned in promoting its DEKALB corn hybrids, even reporting strong orders in its last earnings call. For its Genuity reduced-refuge products (which help control pests), Monsanto is targeting up to 38 million acres, up substantially from 27 million acres last year. Both Dow and Monsanto have plans to set up learning centers to teach farmers how to effectively use their herbicides. Robust spring orders and the results of its aggressive sales efforts should show up in Monsanto’s upcoming earnings report.

Home and beyond

For the rest of the year, Monsanto’s focus is likely to be on Latin America. In its latest crop input market report, Agrium (which entered the Brazilian market last year by acquiring a fertilizer company) projects production in Brazil and Argentina to be ‘significantly’ higher this year. Syngenta, which derived 28% of sales from Latin America last year, plans to quadruple corn production in Brazil and set up a new plant in Argentina soon.  Meanwhile Dow plans to rapidly ramp up its Powercore product line in the two markets.

Monsanto’s recently launched triple-stack corn in Argentina and double-stack corn trait in Brazil should push up its revenue and margins from the market significantly this year. It has already struck an agreement with Brazilian organizations to sell its pest-resistant Intacta RR2 Pro soybeans this year. Details on this should see their way through in its upcoming call.

Foolish takeaway

So good was the pace of orders in its first quarter that Monsanto’s free cash flow expanded to $1.5 billion from $856 million a year ago. Not surprisingly, that prompted the company to up its full-year FCF guidance to $1.8 billion- $2 billion, and EPS guidance to $4.31- $4.41. Monsanto earned $3.70 per share last year.

Nothing would be better than Monsanto sticking to its guidance next week, and I have a hunch it will. Stay tuned as I take you through its numbers and important updates. Click here to add Monsanto to your watchlist.


Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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