Monsanto (NYSE: MON) has been in limbo for more than a year now. On one hand, the company has been working to grow its core business, continuing to offer advances in seeds and agricultural genomics to improve crop yields and produce more food. On the other, Monsanto remains the target of an acquisition bid that Bayer made back in 2016. Monsanto has maintained throughout that it believes the deal will go through, but skeptics have been more critical of the proposed combination, and a recent move from regulators in Brazil has only heightened the level of uncertainty.
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Coming into Wednesday's fiscal fourth-quarter report, Monsanto investors had relatively low expectations, looking for a decline in sales and a net loss. The company gave good news on both fronts, positively surprising shareholders and pointing to the ongoing potential that Monsanto has to thrive either as part of Bayer or independently. Let's look more closely at what Monsanto said and what lies ahead for the company.
A solid end to a good year
Monsanto's fiscal fourth-quarter results pointed to continued growth. Revenue overall gained 5% to $2.69 billion, which dramatically outpaced the $2.53 billion consensus forecast among those following the stock. Net income came in at $20 million, reversing a $191 million net loss in the year-ago quarter. Adjusted earnings of $0.20 per share were far better than the loss of $0.41 that investors were expecting to see.
Monsanto's seeds and genomics business saw dramatic increases in revenue, but profitability was lacking. Substantial double-digit percentage gains in corn-related revenue and sales from soybeans offset weakness in cotton to lift the segment's overall top line by nearly 12%. Vegetable seeds also did well. Monsanto said that corn acreage in Brazil and Argentina was higher than in previous years, and the initial launch year of its Roundup Ready Xtend Crop System helped boost soybean sales as well as rising adoption in South America. Yet the sales gains didn't translate to the bottom line, and Monsanto reported a $123 million pretax operating loss for the quarter.
The situation in the agricultural productivity segment was reversed. Revenue for the segment was down 6%, and gross profits took a hit as well. Yet pretax operating profit came in at $61 million, reversing a bigger loss in 2016's fiscal fourth quarter. The absence of the Latitude fungicide business had a downward impact on revenue during the quarter, but Monsanto is optimistic that pricing for key products in the segment as well as adoption of key technologies should improve in fiscal 2018.
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CEO Hugh Grant was happy with how Monsanto did. "Our record sales and gross profit in the seeds and genomics segment this year," Grant said, "fueled by the outstanding penetration of our latest soybean and cotton technologies and continued adoption of our newest corn hybrids around the world, reflects the need for new solutions in what continues to be a challenging ag economy." The CEO pointed to its past track record of overcoming similar obstacles as a reason for long-term optimism in Monsanto's efforts.
Will the Bayer deal go through?
Monsanto didn't offer financial guidance for fiscal 2018, citing the Bayer merger. It instead pointed to potential growth drivers going forward, including the pricing and adoption of soybean and corn products, the rising use of the Climate FieldView platform, and rising prices for glyphosate. Challenging crop prices for corn could weigh on Monsanto.
Yet the bigger question remains whether the Bayer deal will happen at all. The Brazilian regulatory agency responsible for evaluating competitive impacts of mergers and acquisitions chose to postpone its decision on whether to approve the Bayer-Monsanto takeover, deferring a final decision to the regulator's tribunal. A regulatory document suggested that Brazil would want to see further structural changes to the agreement before offering final approval, and that could necessitate further negotiation between Bayer and Monsanto that could at the very least result in the deal not closing by the end of calendar 2017.
Monsanto investors were nevertheless upbeat about the operating results, and shares of the stock were up almost 1% in premarket trading following the announcement. As long as the company's business is fundamentally sound, it wouldn't be the end of the world if Monsanto had to go on alone rather than combine with Bayer.
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