Has Monsanto Hit Bottom?

Monsanto (MON) warned today that it expects to earn just $3.10 to $3.30 per share in fiscal 2010, well below the $4.10 that Wall Street analysts were expecting.

The culprit is generic Chinese competition to its Monsanto’s herbicide business, which includes the Roundup Chemical brand.

Monsanto looked like it had the makings of a standout stock during a recession. But in the last six months, Monsanto shares have fallen far behind. While the S&P 500 is up 45% since early March, Monsanto is up just 2%. Monsanto shares tumbled 5% in response to today’s news.

One of Monsanto’s problems is that it is a high-quality company, well-respected by investors, in a market rally that has mostly favored low-quality stocks. At the same time, the high-quality parts of Monsanto’s business — its seeds and genomics business — are being dragged down by its lower-technology herbicide unit.

Monsanto execs must persuade investors to ignore short-term shortfalls caused by the Roundup business in favor of the long-term potential of its high-tech, research-driven gains in seeds.

Monsanto’s chief financial officer Carl Casale said Monsanto still expects its gross profit to double from 2007 to 2012, driven by seeds and traits, which should provide more than $5 billion in profit in 2010. By 2012, these businesses should be earning 85% of Monsanto’s profits.

He said:

In short, our growth as a company will not be driven by the 15 percent of the business that will be the agricultural productivity segment, but by the 85% that will be seeds and genomics.

(BusinessWeek’s Dec. 2007 cover story on Monsanto does a good job of explaining the firms’ recent success in genetic products.)

In response to the news, BB&T Capital Markets analyst Frank J. Mitsch lowered Monsanto from “buy” to “hold” and wrote:

We believe the overall earnings momentum appears stalled for the upcoming 12 to 24 months.

He added, however, that Monsanto still is “an attractive long-term story.”

Other analysts were more optimistic. Morgan Stanley (MS) analyst Vincent Andrews wrote:

The “good news” is that from here the earnings base has been reset (and we think at a beatable level) and the “Roundup overhang” and associated short thesis should be almost entirely behind us.

In other words, perhaps this is as bad as conditions get for Monsanto, before it returns to beating Wall Street expectations on a regular basis.

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