Monsanto, a global leader in Agricultural Productivity and Seeds and Genomics production, reported FQ2 09 earnings on Friday. Quarterly EPS results of $2.16 beat consensus estimates by $0.07, despite ongoing weakness in the sales of Roundup. Full-year EPS guidance from management remained at $4.40 - $4.50, which suggests to us more weakness in the back half of 2009.

For the quarter, gross profit increased 14% yoy, largely driven by a 21% increase in profits from seeds which offset a 9% decline in Roundup earnings. Corn and soybean sales also remained quite strong in the quarter; with corn increasing 19% and soybeans increasing 34% yoy. This increase was largely driven by a price push through and a shift to more costly hybrid seeds in the first half of 2009. Sales of Roundup decreased 21% yoy, as volumes trended much lower on inventory management decisions last year, ahead of the expected price increase pushed through this year.

Key Points from the Release and Call

•         Volumes of Roundup are expected to be down by 30M (11% yoy) gallons for the year, largely due to accelerated buying last year ahead of expected price increases
•         Company estimates for 2009 corn acreage were reduced from 90M to 86M, still 1M higher than USDA estimates
•         Company estimates for 2009 soybean acreage were reduced from  77M to 76M, still 1M higher than USDA estimates
•         Management sees strong improvement in corn seed heading into 2010 as SmartStax is expected  to be released to market
•         YieldGard is expected to reach around 5M acres in Brazil in 2009, 3 times the previous estimate
•         Estimate for FQ3 EPS growth was lowered to higher single digits compared to previous consensus estimates of 18%

While guidance for growth in earnings and market share in 2009 is subdued, MON is weathering the current storm fairly well. Roundup sales have fallen off and will likely remain lower for the year; however the company is setting itself up to maintain a strong pricing design past 2009. Many competitors have already lowered prices but management seems willing to sacrifice share to maintain pricing that will carry beyond 2009.

A renewed focus on seed technology and biotech will also likely begin to evolve in the back half of this year, giving MON a strong position in the market as the global economy recovers. The largest catalyst near term will likely be the approval of SmartStax, the company's corn yield enhancer, which is heavily anticipated in the industry.

-GDH