Monsanto BUY Targat Price $ 149

MON

Q1/F15 EPS better than expected;

2015 guidance reiterated

 BUY with US$149 target 

Investment recommendation
From a Monsanto-specific viewpoint, it is the only large cap company under our coverage
list that not only offers substantial growth but offers farmers a better differentiated
and value-added portfolio of products every year when compared to the previous year.
For that reason, we also continue to prefer the company on a relative play. We expect
continued sales volume increases and margin expansion going forward in Seeds and
Genomics, a near term uplift in earnings from their Intacta soybeans, followed by the
rollout of the Xtend system, the potential of the Precision Ag platform a few years out as
well as the more aggressive return of capital to shareholders, all of which continues to
bode well for shareholders.
Investment highlights
Monsanto reported adjusted Q1/F15 EPS of US$0.47 versus our and consensus
estimate of US$0.35. F2015 annual guidance was reiterated at US$5.75-6.00 (on an
ongoing earnings basis).
The company stated that given the stronger than expected Q1 and lower US corn acres,
management now expects Q2 EPS to be down 5-10% versus the prior year. They also
commented that ‘this leaves growth for the year to the third and fourth quarters’, the
latter of which Monsanto continues to expect is breakeven to positive YOY on an absolute
basis (versus a loss in each Q4 over the past five years).
Management commented it now projects Intacta sales to exceed the previously guided
range of 10-12M acres due to stronger farmer demand.
Valuation
We continue to rate the shares of Monsanto a BUY with a target price of US$149 based
upon a 21.5x multiple to our F2016E EPS

 

Q1/F15 results
Monsanto reported adjusted Q1/F15 EPS of US$0.47 versus our and consensus
estimate of US$0.35. The results were above expectations largely due to higher gross
profit in both the Seed and Genomics and Agriculture Productivity segments, partially
offset by higher operating costs and net interest expense. Total gross margin was
reported at US$1.41 billion, above our US$1.16 billion estimate (Figure 1) while
operating costs were US$992 million versus our expectation of US$823 million.
F2015 annual guidance was confirmed at US$5.75-6.00 (on an ongoing earnings
basis) versus our original estimate of US$5.91 and consensus of US$5.87. This
guidance is in line with management’s prior comments of double-digit to mid-teen
growth in F15 EPS.
Gross margin analysis
Seed and genomics gross margin was above our estimate (at US$941 million versus
US$733 million) due to better performance in corn and soybean, slightly offset by
vegetable and other crops. The company reported corn GM of US$525 million versus
our US$423M, soybeans at US$277M versus our US$157M, cotton at US$58M
versus our US$45M, vegetables at US$64M versus our US$81M, and all other crops
at US$17M versus our US$27M. The Agriculture Productivity segment reported GP at
US$470M, above our US$422M estimate.
Operating expenses
Operating costs were higher than expected on an absolute basis and mostly in line on
a relative to sales basis: US$992 million (34.6%) versus our estimate of US$823
million (34.3%). SG&A costs were reported at US$580 million versus our US$487
million estimate while R&D expenses were US$412 million, above our US$336 million
forecast. Net interest expense was reported at US$77 million, above our US$72
million estimate.
Management outlook
The company stated that given the stronger than expected Q1 and lower US corn
acres, management now expects Q2 EPS to be down 5-10% versus the prior year.
They also commented that ‘this leaves growth for the year to the third and fourth
quarters’, the latter of which Monsanto continues to expect is breakeven to positive
YOY on an absolute basis (versus a loss in each Q4 over the past five years). Given
the lower global corn acreage expectation, seeds and genomics gross profit YOY
growth for F15 is now expected in the high single digit range versus double-digit YOY
growth the company suggested in Q4/F2014. Management still expects growth in the
corn business for the year due to share gains and price mix lift. Soybeans gained 7%
margin lift in Q1 and the company expects further positive influence in F15.
Regarding operating expenses, the company noted that in order to provide funds for
incremental spend on new platforms, disciplined plans were put in place with the
expectation to keep full-year core spending flat to slightly down YOY.
Cash flow guidance was left unchanged. Cash provided by operating activities was
guided at US$3.2-3.6 billion while cash required by investing activities is expected to
be in the US$1.2-1.4 billion range, resulting in a free cash flow range of US$2.0-2.2

Tax website http://www.youroffshoremoney.com

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