Monsanto Company (MON) is scheduled to report first-quarter fiscal 2015 results before the opening bell on Jan 7. The company reported a negative earnings surprise of 12.50% in the preceding quarter, with an average surprise beat of 0.08% in the last four trailing quarters. Let’s see how things are shaping up prior to the upcoming earnings announcement.
Factors of Influence
Monsanto has made strategic attempts to improve its business through productive technology innovations. In fiscal 2014, the company launched the Intacta technology for higher soybean yield. For the current fiscal year, the company expects to generate double-digit profit growth in the Seeds and Genomics business segment by capitalizing on the growing demand for corn and soy.
The company’s core businesses are expected to contribute more than $4 billion to gross profit growth by fiscal 2019. Monsanto is constantly augmenting its shareholders’ value through attractive share buyback and dividend programs.
Moreover, the company is targeting a debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 1.5 by the end of fiscal 2015. Also, declining crude oil prices are expected to benefit the energy-intensive agricultural sector. Hence, agricultural companies such as Monsanto (that use inputs derived from energy consumption), are expected to earn greater revenue and margins going forward.
However, Monsanto’s profitability is subject to risks of higher expenses. For fiscal 2015, investments in new platforms and higher debt levels will increase operating and interest costs of the company. Moreover, the global market for Seeds and Genomics is cluttered with numerous agrochemical and seed marketers. Hence, Monsanto faces stiff competition in this segment, particularly from row crops and vegetable seeds.
As a result, the company is forced to come up with high-yielding varieties over time, which increases its research and development (R&D) expenses. Such initiatives also involve huge investments and governmental permits. This may lower profits and hurt top line in the upcoming quarters. Besides, societal/government resistance to genetically modified crops and farmers’ reluctance to accept new products remain major offsetting factors for the company.
Earnings Whispers
Our proven model does not conclusively show that Monsanto is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for an earnings beat. That is not the case here, as we will see below.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate of 34 cents, is currently pegged at 0.00%. This indicates in-line earnings for the stock.
Zacks Rank: Monsanto’s Zacks Rank #3, when combined with a 0.00% ESP, makes surprise predictions difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revision momentum.
Other Stocks to Consider
Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Resolute Forest Products Inc. (RFP), with an Earnings ESP of +4.00% and a Zacks Rank #1.
Archer-Daniels-Midland Company (ADM), with an Earnings ESP of +5.44% and a Zacks Rank #3.
Alcoa Inc. (AA), with an Earnings ESP of +12.00% and a Zacks Rank #3.
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