Take Monsanto’s Earnings Margins with a Grain of Salt




Recently, farmers have experienced a squeeze in their net cash income, which has led them to cut costs on seeds and fertilizers. As a result, Monsanto (MON) sales have declined, and weakness is also evident in fertilizer companies (FXZ) such as PotashCorp (POT), Mosaic (MOS), and CF Industries (CF). Some companies have offered deep discounts to their customers in order to maintain sales volume but cracks on margins were visible.

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4Q16 margins

Wall Street analysts estimate EBITDA (earnings before interest, tax, depreciation, and amortization) of $201 million, which would yield an EBITDA margin of 8.6% for Monsanto in 4Q16. This margin is slightly below 8.7% in 4Q15.

Next 12 months

However, if we take the next 12 months into consideration, the EBITDA margins expand to 32% compared to 27% in the last 12 months, according to analysts’ estimates. Much of the lift in margins appears to be coming in 3Q17, when margins are expected to expand from 40% to 51%. However, we would take this forecast with a grain of salt because a lot can change over a year in the volatile commodity business. Plus, we can’t predict weather—which the agribusiness relies so heavily on—a year in advance.

Monsanto and Bayer are also expected to merge by next year. It remains to be seen how the merger transaction plays out.

Next, we’ll discuss earnings estimates for the company.


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