Monsanto — How to Play Wednesday’s Earnings Report

by Jamie Dlugosch | October 4, 2011 4:31 pm

Agricultural products company Monsanto (NYSE:MON) [1]reports earnings for the quarter ending Aug. 31 on Wednesday before the market opens. With the market in free fall, the news is likely to move the stock significantly one way or another.

Commodity prices have been on a roller coaster in 2011. Fears of inflation during the first part of the year pushed prices higher. Today, it is the threat of deflation with global economies faltering. Which view the needle falls toward will depend partially upon Monsanto’s report and guidance for the future.

Given the focus of the company on agriculture, shares should be trading more like a defensive stock irrespective of economic activity. Instead, Monsanto has been quite volatile.

During the past three quarters, Monsanto has exceed average Wall Street estimates of earnings:


During the quarter ending May 31, the company benefited greatly from increasing prices. Profits in that period beat analysts’ expectations by 16 cents per share. As a result of that performance, one would think estimates for the Aug. 31 period would be on the rise. Instead, they have slipped by three cents per share during the past 90 days. The company now is expected to lose 27 cents per share.

For the full year also ending on Aug. 31, Monsanto is expected to make $2.87 per share. In the following year, that number increases by 19% to $3.42 per share. At current prices, Monsanto trades for 21.5 times current-fiscal-year estimated earnings.

With the dramatic shift in view regarding the global economy, MON shares took a step back since July 1 — the stock is down 14.25% since then. That is slightly better than the S&P 500, down 16% in that time frame.

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Despite recent losses, the stock still is up 28% during the past 12 months:

When market commentators suggest that earnings estimates are likely too high, Monsanto comes to mind. A three-cent drop in the estimate for the quarter ending Aug. 31 is paltry. The stock is holding up better than most thanks to what still are expected to be strong growth numbers in the coming year.

I’m not convinced. Defensive stocks like Monsanto are by their nature slow-growing animals. Growth near 20% should be viewed as an anomaly that is not likely to be sustainable. Monsanto is at a crossroads. Shares have yet to lose full steam and could plummet if earnings do not meet expectations.

The bigger issue for Monsanto will be guidance. A likely reduction in guidance for the coming fiscal year should be met by harsh selling in the market. What upside potential is there for the stock? It is difficult to paint a picture of what moves Monsanto higher here.

I would look to sell this stock short in advance of earnings. The odds would favor a decline in share value after a report that fails to impress.

Other companies reporting results this week include Marriott International (NYSE:MAR[3]), Ruby Tuesday (NYSE:RT[4]), Helen of Troy (NASDAQ:HELE[5]) and Constellation Brands (NYSE:STZ[6]).

  1. MON) :
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