Monsanto: A Bumper Crop of Profit

Shares hit a new 52-week high Monday after the agricultural-science giant raised its earnings outlook for the year

Seeds to plant corn for ethanol and herbicides are in strong demand, giving a healthy boost to Monsanto Company's (MON) sales and profits. When the Kansas City (Mo.) company raised its profit outlook for this year on Sept. 17, its shares perked up to a new 52-week high.

Monsanto said it now sees 2007 ongoing earnings per share of $2.00, vs. a previous estimate of $1.75-$1.80. Analysts were forecasting EPS of $1.83 for the year, according to Thomson Financial. Net earnings per share for 2007 should come in around $1.79 (including one-time items), up from $1.25 in 2006.

The supplier of bioengineered seeds and other agricultural products cited strong sales of corn seeds in Brazil and Argentina that were stronger than originally anticipated and higher pricing for its Roundup herbicides. The company also noted its full-year effective tax rate of 30% (from the resolution of several tax audits and the company’s ability to use net-operating loss carry forwards in Argentina) will help earnings.

"By all measures, Monsanto has achieved extraordinary performance across our business in what was an extraordinary year for agriculture," said Hugh Grant, Monsanto chairman, president and CEO, in a release. "Our performance this year serves as a springboard for our future success, setting us up for expanded growth opportunities not just for 2008, but through the turn of the decade."

Monsanto shares rose nearly 3% to $75.56, after touching a new 52-week high of $76.98 during trading on Sept. 17. The stock has already shot up 45% this year.

"Today’s announcement accentuates the strength of Monsanto’s global portfolio, as farmers in Latin America, supported by the higher global corn prices, are preparing to increase corn plantings," wrote Goldman Sachs analyst Robert Koort in a note on Sept. 17. He noted that "a bonus" is the higher prices in its Roundup business.

"Monsanto is the undisputed leader in the ag biotech space, and we believe that the product pipeline is sufficiently robust to keep investors excited about the mid-to-long-term opportunity with market-share wins, additional biotech trait penetration (trait intensity), and starting in 2008 higher trait prices" for Roundup Ready and Roundup Weed, Koort wrote. He has a buy recommendation on the shares (Goldman Sachs has received compensation for investment banking services in the past 12 months).

Goldman's Koort said the one "pushback" by investors is the stock's rich valuation. However, given that Monsanto has raised its outlook numerous times, "what appeared to be lofty valuations turned out to be substantially more modest."

The rosy profit outlook follows Friday's announcement that Monsanto signed a licensing agreement with Dow Chemical (DOW) that involves introducing a product called SmartStax, which is corn seed stacked with eight different genetic traits to help farmers fight weeds and insects, by 2010.

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