Monsanto's Recent Surprise
Nikhil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Monsanto (NYSE: MON) released its earnings on Thursday morning, and the company's stock is up 6.66% since then. Monsanto's investors can only be happy with its short term results.
Monsanto's net income rose to .23, up from 0.02 a year earlier. This is especially striking because according to Yahoo Finance, analysts were expecting EPS of 0.16 for this quarter, giving Monsanto a 43.75% earnings surprise. There was also growth in other areas of the financial statement.
Revenue increased 33% from a year earlier; However, it wasn't the revenue increase itself that has brought up the share price, it's the drivers behind the revenue that has converted the skeptics.
-Seeds and Genomics segment had a 32% increase in sales due to strong business growth in Latin America.
-Quote from Conference Call: "growth was driven by the mixed benefit that came from significant trade expansion and by volume growth in both Brazil and Argentina," something that may continue to help Monsanto going into the future.
-Corn seed sales increased 46% and Cotton Seed Sales increased 73%
There was also a 71% increase in FCF from where Monsanto was last year, which signals good things to come. Monsanto stated that its overall year outlook was for EPS between 3.39 and 3.44.
Inventory Analysis: At the Motley Fool, one of the handiest methods of analysis that I learned was how to do an inventory analysis of recent quarterly results.
Monsanto's Inventory situation is as good as can be, setting future expectations to meet or exceed current valuation. Not only did inventory decrease from where it was at this point last year, but Monsanto managed to hit all the highlights. Finished Goods reduced from 1135 to 953, signaling that demand is in place. Moreover, management gave a subtle signal that they expect higher demand going forward with a 10% increase in goods in process, and a 20% increase in raw materials.
What does this all mean?
Well, this growth is great for the short term and all, but for a longer term Monsanto investor, how did the recent quarter effect the longer term valuation? With Expected EPS between 3.39 and 3.44, Monsanto should have a Forward P/E of 20-22ish. With a P/B of 3.6, and a PEG ratio (Finviz.com) of 2.21, Monsanto should be considered anything but cheap. On the other hand, you have to pay up for growth, and some would argue that Monsanto is making the premium worth your while (see the above inventory evaluation). The growth is also relatively clean and debt free. Monsanto's debt to capital ratio has actually lowered by 1% in the last year. A 1.55% dividend should also be taken into consideration when making an investment, but I really see Monsanto as a toss-up for future investment. It looks well valued for future expectations, even if some of the analysts and investors may be a bit overoptimistic after the wonderful earnings surprise.
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