Monsanto Earnings Preview

Monsanto MON will report earnings before the bell on Wednesday. This is a priced-to-perfection stock with street consensus mostly bullish on tomorrow’s report. Here’s what to look for.

Expectations

Monsanto is expected to announce fiscal second quarter earnings Wednesday before the opening bell. The conference call is scheduled for 9:30am eastern time. Analyst consensus as reported by Benzinga Pro call for EPS of $2.58 with revenue of $5.29 billion—a 15 percent and 11 percent increase year over year, respectively.

Analyst & Media Commentary

Deutsche Bank placed a price target of $112 on the stock saying, “Our $112 price target is based on Monsanto trading at 22.4x 2014 EPS in 12 months, roughly in-line with its current multiple of 23.6x (‘13E EPS). We believe this valuation is warranted by the Monsanto’s defensive earnings growth characteristics as well as our forecast of 11.3% in 2013E and 11.3% in 2013E, and the close correlation we have found (R2>75%) between chemical sector valuations and ROIC.”

Piper Jaffray maintains its Overweight rating with a price target of $130. Speaking of the recent deal between Monsanto and rival DuPont DD, it said, “We will adjust our estimates as further details of the license agreement are made available. We estimate that this deal could add $0.20 in EPS to our FY14 EPS estimate.”

The Bull Case

In March, Monsanto and DuPont resolved a pending patent lawsuit over technology used in soybean and corn seeds that were genetically modified. According to a Morgan Stanley MS research note, DuPont will pay a minimum of $1.75 billion of payments to Monsanto to license its Roundup Ready 2 and Xtend technology from 2014-2023. The final payment will be based on the number of acres sold plus a per acre royalty fee of $5 to $7.

Analysts see this has a major revenue driver with Piper Jaffray also predicting an EPS gain of $0.20-$0.25 per year until the agreement ends.

Seed sales grew 27 percent to $1.1 billion in the prior quarter largely driven by farmers in Brazil and Argentina. International sales, according to Analyst Don Carson of Susquehanna Financial Group will be the company’s "primary driver of near-term growth."

The Bear Case

First, valuation. The stock is expensive compared to its peers but others argue that it’s deserved given its revenue growth and increasing international market share. It’s also sitting near its 52 week highs making investors worried that if the company doesn’t continue to blow away earnings, the high valuation could cause near term mean reversion.

Technical Analysis

The stock has seen a strong uptrend since November with gains of nearly 23 percent. After weathering what was a double top (some would argue triple top), it made a strong move to upside. The chart suggests more upside ahead with an RSI of 54 and other indicators not signaling severely oversold conditions.