Monsanto Grows Faster as It Prepares for Bayer

The business for agricultural products and chemicals has been going through a major transformation, and industry giant Monsanto (NYSE: MON) has been right in the middle of the action. Having received a buyout bid from German conglomerate Bayer, Monsanto investors have regained some of the ground over the past year that the company had lost in 2015 from a downturn in the ag industry. Coming into Wednesday's fiscal fourth-quarter report, Monsanto investors wanted to make sure that the company would produce solid results that wouldn't complicate the acquisition by Bayer, and if anything, Monsanto's performance was so good that some investors might actually wish that a merger wouldn't go forward so that they could hang onto their shares. Let's look more closely at how Monsanto did and what it means for its future.

Image source: Monsanto.

Monsanto climbs toward the sun

Monsanto's fiscal fourth-quarter results showed a huge rebound from year-ago levels. Revenue jumped by almost 9% to $2.56 billion, which was about $180 million more than most investors were expecting to see. Monsanto still lost money on a GAAP basis, but the $191 million loss was down by three-fifths from what the company lost in last year's fiscal fourth quarter. Moreover, after adjusting for restricting charges, environmental and litigation issues, and tax matters, adjusted earnings of $0.07 per share were far better than the consensus forecast among investors for a $0.03 per share loss.

Looking more closely at how Monsanto did, the key seeds and genomics segment showed considerable rebounds in nearly every category. Sales jumped by a quarter, with corn-related sales climbing by a third and soybeans posting gains of nearly half. Cotton seeds and traits had the best performance within the division, soaring almost 80%. The segment erased a $773 million pre-tax loss in the year-ago quarter to post a modest $34 million pre-tax profit this year.

On the other hand, the agricultural productivity division was much weaker. Sales fell about 10%, and the unit posted a pre-tax loss of $137 million, reversing a year-ago gain. Even after adjusting for nearly a quarter billion dollars of environmental and litigation charges, adjusted pre-tax profit was down more than 40% from the fourth quarter of fiscal 2015.

CEO Hugh Grant commented succinctly on Monsanto's results. "Despite challenges to our business in fiscal year 2016," Grant said, "we delivered on the drivers that position Monsanto for the return to EPS growth in the year ahead." The CEO noted that "we are entering a new era in agriculture, where growers are demanding new solutions and technologies to be more profitable and more sustainable." Yet he believes that Monsanto is up to the task of meeting its customers' needs.

What lies ahead for Monsanto

Monsanto expects its turnaround to continue throughout the coming year. In Grant's words, "Our fiscal year 2017 priorities are focused on delivering on the operational plan and key business milestones for the year while also executing on the necessary steps to close the deal with Bayer."

In particular, Monsanto sees strength coming from a couple of sources. On one hand, efforts to keep costs in check have helped boost profits recently, and the company sees that trend continuing. In addition, increased penetration of the company's soybean technologies should help drive growth in seeds and genomics, showing the value of investment in innovation.

For the 2017 fiscal year, Monsanto expects to earn between $3.83 and $4.35 per share on a GAAP basis. After considering restructuring costs, tax issues, and Bayer acquisition expenses, adjusted earnings guidance of $4.50 to $4.90 per share would represent only a modest gain from the $4.48 per share in adjusted earnings that Monsanto posted for fiscal 2016.

Monsanto investors didn't have strong reactions to the news, with shares of the agricultural products company trading on either side of unchanged in pre-market trading following the announcement. With Monsanto still optimistic that the Bayer merger will go through within the next year, the big question facing investors is why the stock price is still fully 20% below the all-cash buyout offer of $128 per share. To the extent that the discount reflects uncertainty about a deal going through, it just makes it all the more important for Monsanto to keep focusing on its fundamental business strength -- just in case the merger ends up not happening after all.

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