The Company

The News

Shares of

Monsanto

The St. Louis-based company said it now expects to earn $1.75 a share for its fiscal second quarter ended Feb. 29. Including a 23-cent benefit from a bankruptcy settlement profits will hit $1.98. Monsanto raised earnings estimates for fiscal 2008 to between $3.15 to $3.25 a share, excluding the gain, based on strong pesticide and seed sales, as well as greater global use of its genetically modified seeds. Previous guidance was $2.70 to $2.80 a share.

Consensus estimates compiled by Thomson Financial indicated that Wall Street expected pregain earnings of $1.35 a share in the second quarter and $2.87 for the full fiscal year.

Monsanto said its Roundup brand pesticide was in high demand world-wide and estimated it would account for gross profit of $1.7 billion to $1.8 billion in fiscal 2008.

Chief Executive Hugh Grant said the company's strategic plan through 2012 was succeeding ahead of schedule and that gross margins should come in between 52% and 54% this year, two years earlier than it expected.

UBS analyst Chris Shaw on Monday upgraded the stock to Buy from a short-term Sell rating, based on pending Department of Agriculture seasonal planting figures that indicated an eight million to nine million acre reduction in corn acreage. He wrote that the market has priced the shift to soybeans and spring wheat.

Monsanto is scheduled to report second-quarter earnings April 2.

The Analysis

If it gets planted in the ground, Monsanto has a hand in it, and its global breadth means growth won't wither any time soon.

It's not a cheap stock, but in some respects, that doesn't matter. Shares at Thursday's close, the lowest point in a recent dip, had ebbed 25% from their 52-week high of $129.28, reached Jan. 14. They've been rising since then because the market knows that the combination of overseas growth, an adjustment to U.S. planting expectations and a strong genetic seed development pipeline are all fast-sprouting parts of a global agricultural commodities boom.

"People need to eat," says Bill Selesky, and analyst at Argus Research. "What it comes down to is that it's not only a North American phenomenon. You're seeing good results in a lot of the world's economies. Places in Europe, Latin America and Asia, places where Monsanto does good business, are doing very well as far as commodity prices go."

Mark Gulley, an analyst with Soleil Securities, raised his own full-year estimate to $3.05 last week, and wrote in a Wednesday report that "Monsanto is bigger, faster and smarter than consensus thinks."

According to Gulley, better results from Monsanto means the company can drive market-share gains for its seeds and price increases for its bioengineered products.

There's growing evidence that Monsanto is making inroads on Dupont, formerly the uncontested leader in genetically modified seed products, says Selesky.

"That's one of the reasons you keep seeing these guys raise guidance," he says.

A strong position in the corn seed market in Brazil, a heavy ethanol producer, also shores up its Latin America business, Selesky says.

The Bottom Line

Valuation concerns have dropped Monsanto shares in the past few months, but growth-stock investors have plenty of reasons for their confidence to take root.

"Monsanto's a growth-stock story. Valuation levels are pretty high relative to other companies, but they have the ability to post above average earnings growth rates," Selesky says. "People are wiling to pay up for sustainability in increased earnings. On a historical basis their price is fairly high but we don't see any slowdown coming any time soon."

The Roundup story also helps rope in doubts. Shaw wrote that reduced competition from Chinese rivals and global demand means both its branded and generic glyphospate pesticide should be able to push prices this year and next.

Selesky says the combination of factors and the company's own success in reining in costs mean a potentially strong harvest for some time.

"This is not something that's going to end in six or 12 months," he says. "If things go according to plan, this could be good for another couple of years."