Monsanto Earnings Matter More Than GMO Worries

by James Brumley | January 8, 2014 11:30 am

It has been a busy year for Monsanto (MON[1]) and a volatile one for MON stock, even if the year is only a week old.

monsanto-earnings-mon-stockThe seed supply company learned late last week that General Mills (GIS[2]) would no longer be using genetically modified ingredients in its Cheerios breakfast cereal[3] (a big chunk of Monsanto’s business is the sale of bioengineered seeds), and on Wednesday, the Street received its quarterly report for Monsanto earnings.

What do we need to know about last quarter’s results for MON stock? And more than that, what’s the likely fallout from the decision by General Mills to at least take a baby step toward what’s perceived as a safer and more marketable product base?

As always, it depends.

Monsanto Earnings for Q1

With or without the nagging anti-GMO movement casting a shadow on Monsanto’s outlook, there’s no denying the company recently wrapped up a great Q1.

Monsanto earnings were up more than 8% on a year-over-year basis, growing from 63 cents to 69 cents per share[4] for the quarter ending Nov. 30. MON earned 67 cents on an operating basis, but forecasters were looking for a bottom line of only 64 cents. Sales were up by 7%, reaching $3.1 billion.

Things were so solid for MON in the first quarter of fiscal 2014, in fact, that the company made a point of reiterating and affirming its full-year forecast[5] for a profit between $5 and $5.20 per share, up significantly from last year’s bottom line of $4.56.

MON stock responded by improving 3% Wednesday morning.

However, what exactly is behind all this big growth for Monsanto is where investors find something of a stumbling block.

The bulk of Monsanto’s business is the sale of bioengineered seed, and the bulk of 2014’s growth is projected to be driven by a newly engineered soybean seed. Activists, however, just forced a food producer to remove an engineered food from one of its cereals.

If Cheerios is just the beginning of a bigger movement, the current Monsanto menu doesn’t offer socially acceptable — and therefore marketable — seeds.

MON stock owners need not panic, though.

Is Non-GMO Food the New Norm?

Just to get the facts straight, General Mills isn’t changing the main ingredient in Cheerios — oats — because it doesn’t need to. See, whole grain oats aren’t available in a bioengineered form.

What General Mills is changing is the cornstarch found in Cheerios. For the original Cheerios anyway, that ingredient will now only be sourced from non-genetically engineered corn[6], making the basic box of Cheerios a 100% natural product.

The switch is being hailed as a victory for food-safety activists who have been clamoring for food companies to migrate toward more natural (i.e., not genetically engineered) ingredients. After all, the public spoke, and forced the world’s largest packaged food company to make the change consumers want.

Problem: Not only is General Mills not moving to exclusively non-GMO sources — at least not yet — for any of its other brands, it’s not even switching to non-bioengineered sugars for its Honey Nut and Apple Cinnamon varieties of Cheerios. And even with the switch from a GMO-sourced corn starch, most estimates maintain that two-thirds of the food found on the average grocer’s shelves still have some sort of GMO ingredient in them[7].

In other words, the General Mills decision is just a drop in the bucket.

Still, all big journeys start out with that first small step. This is likely to be the shape of things to come for all packaged foods, even if it takes years to get to the final destination.

So what does this paradigm shift mean for Monsanto?

The Anti-GMO Movement Is Nothing for MON Stock Owners to Sweat

Truth be told, not much right now. Compared to the amount of seed and dried goods the company already sells vs. the amount of genetically modified corn starch being taken out the Cheerios recipe, Monsanto won’t even notice. If non-engineered seeds and plants do become the new norm, though, we might well see an overhaul of not just Monsanto’s products, but for all seed and food companies.

With all of that being said, the hype surrounding the consumer “victory” inside the Cheerios box — and even the momentum it may add to the anti-GMO effort — shouldn’t be a particular worry for MON stock owners.

Stand wherever you like on the merits or risks of genetically modified plant-based foods. Just know that if the laws change and ultimately, totally ban the use of bioengineered seeds (which is happening in some places[8]), Monsanto still is going to be first in line to offer farmers non-modified seeds. That’s the advantage of size and deep pockets … the ability to put pressure on smaller providers while simultaneously employing a potent sales effort no matter what’s approved to sale.

In other words, even if the game changes, MON stock will be fine — Monsanto still is the best player on the field because it’s the biggest player on the field.

We all have to eat something, and at the end of the day, we’ll all pay whatever price we have to in order to avoid going hungry.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. MON:
  2. GIS:
  3. no longer be using genetically modified ingredients in its Cheerios breakfast cereal:
  4. growing from 63 cents to 69 cents per share:
  5. reiterating and affirming its full-year forecast:
  6. that ingredient will now only be sourced from non-genetically engineered corn:
  7. still have some sort of GMO ingredient in them:
  8. which is happening in some places:

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