Trading Idea: Monsanto
Shares of St. Louis- based agricultural products company Monsanto (NYSE: MON) have broken out to new multi-year highs ahead of the company's quarterly earnings report which is scheduled for January 8, prior to the opening bell. The chart pattern that has formed heading into this key report suggests that there could be more upside in the stock at the beginning of 2013.
In some sense, Monsanto is a turnaround story. Despite being the world's leading biotechnology seed company for many years, Monsanto came on hard times in 2010. Over the long-term, Monsanto shares have performed excellently, but the share price was hammered in 2010 with the stock falling to a low of below $50 after trading as high as $140 in 2008 prior to the financial crisis. In fact, at the time, CNBC market-guru Jim Cramer said, "This may be the worst stock of 2010."
The problems at the company centered around guidance which was too optimistic and a string of disappointing product launches. When the company's products did not meet the expectations of farmers, Monsanto was forced to slash its prices to protect market share. Competition to its Roundup line from from low-priced generic products made in China also hurt the company's financial performance.
It turns out, however, that just when things were looking the bleakest for Monsanto, it was time to buy the stock. Shares have steadily climbed back from their 2010 lows and in recent weeks Monsanto has broken out to new highs not seen since the latter part of 2008.
Now that MON has convincingly broken out above the $90 level the stock may be ready to make a run towards $100 and beyond. In 2012, shares rose more than 36 percent, outperforming the S&P 500 by a significant margin and it appears that Monsanto has got its mojo back. What has been driving the stock performance is good ole' financial execution.
Both revenues and net income have been up for the last three years and analysts are modeling revenue growth of better than 8 percent and EPS growth of almost 20 percent for fiscal 2013. Given the pessimism that surrounded the stock in 2010, it is this kind of growth that has been able to drive share gains.
For the upcoming quarter, analysts are modeling EPS of $0.37, which represents year over year growth of 61 percent for the bottom line. On the top line, sales are expected to be up a little better than 8 percent to $2.64 billion. Over the last 90 days, analysts have become slightly more bullish on the company's earnings outlook, raising estimates for the November quarter by a penny from $0.36 and lifting expectations for the February quarter by three pennies to $2.60.
Monsanto will be a stock to watch heading into its January 8th earnings report and the results could provide a further upside catalyst. The combination of bullish analyst sentiment along with chart momentum could lead to a further breakout in the stock if the company's results come in strong.
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