Will Monsanto Ultimately Jettison Roundup and Herbicides Operations? (MON)

Monsanto Co. (NYSE: MON) posted a drop in third-quarter earnings to $694 million, or $1.25 EPS.  That compares to $811 million, or $1.45 EPS, a year ago.  Revenue fell to $3.16 billion from $3.54 billion a year ago.  Consensus estimates from Thomson Reuters were for $1.17 EPS and $3.45 billion in revenues.  Monsanto also put its annual earnings at the low end of its $4.40 to $4.50 range.  Estimates are for $4.40 EPS.  While this is decent on the earnings front, the reorganization of the Roundup and herbicides operations is the real story here.  That unit contributed the most to the revenue decline. It is hard to not wonder if this means a spin-off or sale of the unit is possible.

In a restructuring, Monsanto is creating a separate division for its Roundup and other herbicides business.  The company said this is to enable the company to better align spending and working capital needs and is designed to enable it to stabilize the business and allow it to deliver optimal gross profit and a sustainable level of operating cash.

Along with this new division restructuring, there will be an approximately 900 employee reduction throughout the company.  These cuts will also vary from country to country and will be less than 4% of its global workforce.

These restructuring actions will require a one-time restructuring charge that Monsanto expects will be in the vicinity of $350 million to $400 million.  On a GAAP basis or on a net basis, it will trim $0.41 to $0.47 per share in fiscal year 2009. The company expects to complete its restructuring in fiscal year 2010.

Here is the issue at hand.  The quarterly sales for Roundup and its herbicides unit in its fiscal third quarter were $614 million.  The problem is that is down from $1.168 billion in the third quarter of 2008. Monsanto’s goal  is to double gross profit from the 2007 base of $4.2 billion to roughly $8.6 billion to $8.8 billion in 2012.

If the Roundup and herbicides unit can contribute to that materially then a spin-off or disposition is unlikely.  The volatility around the unit may be a challenge for management if it has this growth trajectory.

If we were making odds in Vegas, we’d put the likelihood that a spin-off is unlikely and probably under 50% in the near-term.  If the volatility continues there, then exploring deeper alternative above and beyond a unit restructuring would seem much more likely.

Monsanto shares are trading up 1% just over $80.00 in pre-market trading.  Its 52-week trading range is $63.47 to $141.82.  At the $4.40 “lowest-end” level, its baseline forward P/E ratio for normalized earnings before restructuring is about 18.2.

Jon C. Ogg
June 24, 2009