Monsanto misses revenue estimates on weaker Roundup sales

Monsanto (MON) reported earnings that topped estimates, but revenues fell short of expectations and the company recorded negative free cash flow.

Total revenues fell 11 percent on weak sales of the company’s branded glyphosate herbicide, Roundup, which were partially offset by strong sales in the core seed and trait franchise. Roundup sales and gross profit (revenues less cost of goods sold) plunged 47% and 54%, respectively, as massive amounts of generic brands flooded the market.

According to Monsanto’s estimates, generic inventories will finish the year at a level equal to 40% of next year’s consumption, which has put extreme pricing pressure on both generic and branded products. Adding fuel to the fire, distributors are slashing prices in order to move this heap of inventory and generate cash.

Despite branded competitors’ price concessions, Monsanto has stubbornly kept Roundup prices unchanged. As a result, Monsanto estimates the price spread between Roundup and its primary competitors on a gallon basis has widened from roughly $2 in September 2008 to about $10. This premium can’t possibly be sustainable on a long-term basis and I expect Monsanto will ultimately lower Roundup prices.

On a brighter note, the seed and genomics franchise continues to deliver and recorded nice gains in market share and trait penetration. Seed and genomics gross profit has grown 22% year-to-date versus 2008, with corn seeds still the biggest driver expanding gross profit by 21% year-to-date. Monsanto expects high-single digit percentage price increases for its existing seeds, and additional pricing gains through further trait penetration.

Despite near-term concerns about Roundup, there is little reason to believe that the seed business won’t continue its break-neck growth and ultimately increase the bottom line. Agricultural productivity is a political priority in most major economies, which is driving policy that encourages better and more intensive agricultural practices.

Genetically modified seed is already the standard in corn and soy in the U.S., while Brazil and Argentina are driving a new wave of growth. Don’t be surprised if China, Russia, and Eastern Europe provide the next wave.
Monsanto is currently down 4%.

--

Peter J. Lazaroff