Monsanto Displays Robust Growth Drivers Amid Headwinds

On Jan 12, we issued an updated research report on premium agricultural chemicals firm Monsanto Company (NYSE:MON) .

Over the last month, shares of this Zacks Rank #3 (Hold) stock yielded a return of 1.2%, outperforming 0.9% growth recorded by the Zacks classified industry.

Inside Story

Monsanto reported better-than-expected first-quarter fiscal 2018 earnings (ended November 2017). The company stated that the upside was primarily driven by healthy growth in South American business. Monsanto anticipates to report stronger earnings in the upcoming quarters on the back of higher volume and pricing for INTACTA RR2 PRO soybeans in South America, gains secured from Precision Planning business spin-off (closed on Sep 5, 2017) and increased glyphosate pricing.

Moreover, Monsanto expects to successfully close Bayer AG’s (OTC:BAYRY) buyout deal by early 2018. The company believes this alliance would unlock a number of business opportunities. Along with Bayer, Monsanto is aimed at propelling innovation for farmers, develop advanced integrated optimized solutions for the cultivators, and provide new offerings in the market which would be highly beneficial for farmers.

Monsanto has been strengthening its competency on the back of increased innovation investments, as well as new research and development deals. The company is currently progressing on 20 new research and development projects. Monsanto believes innovative farming solutions produced through these programs will help farmers battle severe agricultural constraints such as drought, water scarcity, climatic changes, land availability issues, plant diseases, incidence of weeds, and insects. Moreover, the company’s business subsidiary — The Climate Corporation — and the BioAg Alliance with Novozymes are also inventing state-of-the-art crop-yield enhancing solutions for cultivators.

However, we notice that Monsanto is a highly levered company with approximately $6.9 billion of long-term debt at the end of the fiscal first quarter. We believe, if unchecked, such high debt levels will increase the company's financial obligations and impact its profitability.

Furthermore, we believe extensive commercial rivalry within the global seeds, traits and agricultural chemical industry might dent Monsanto’s revenues and profitability in the quarters ahead.

In addition, Monsanto’s cost and sales are highly sensitive to commodity-price fluctuations. Weak agricultural products’ prices might weigh over the company’s near-term revenues and margins. Given that incomes of farmers are directly related to agro-product prices, lower prices are reducing farmers’ income, and adversely affecting their seed and chemical product purchasing decisions, thereby hurting Monsanto’s top and bottom lines. For instance, weak corn pricing in North America might hurt Monsanto’s revenues in the upcoming quarters of fiscal 2018.

Stocks to Consider

Two better-ranked stocks in the industry are listed below:

Agnico Eagle Mines Limited (NYSE:AEM) currently carries a Zacks Rank #2 (Buy). The company has pulled off a positive average earnings surprise of 58.83% for the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

AK Steel Holding Corporation (NYSE:AKS) currently carries a Zacks Rank #2. The company has generated a positive average earnings surprise of 74.16% during the same time frame.

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