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http://www.thestreet.com/print/story/10720387.html

›A Kinder, Gentler Monolith?

By Scott Eden
04/07/10 - 04:01 PM EDT

ST. LOUIS (TheStreet) -- Monsanto's moment of self-reckoning has arrived -- at least when it comes to its financial growth forecasts.

In a conference call with analysts and investors Wednesday morning following another disappointing quarterly earnings report, Monsanto management effectively said that they'd got it all wrong. They were turning over a new leaf -- or a new cornstalk, as the case may be.

"This management has eaten a lot of crow," said Charlie Rentschler, an equities analyst at Morgan Joseph who participated in the call and described it as "very sober."

"They're admitting their mistakes and they're trying to modify their ways. Assuming they can do this, it's a step-change in how this company has been operated. As far as I'm concerned they've been a pretty arrogant bunch," Rentschler said of the company, especially in its relationships with distributors and end-users on the farm.

"They've had a lot of swagger -- a do-it-my-way-or-hit-the-highway-type attitude. They say now that's going to stop."

As reported, Monsanto admitted in its fiscal-second quarter earnings release that its ambitious growth projections -- which called for a doubling in gross profit between 2007 and 2012 for implied earnings of as much as $6 per share -- were unrealistic.

The realization appears to have occurred after increasing numbers of growers refused to pay premium prices for Monsanto's latest genetically engineered seed products, one for corn and the other for soybeans, called SmartStax and RoundUpReady 2, respectively. [Actually, the next-gen soy product is called RoundupReady 2 Yield, and the word “yield” is a critical part of the rationale for the product (#msg-47858225).]

Much of Monsanto's future growth is tied to the success of these two seeds, whose bioengineered genetic traits had been marketed as high-yield crop producers even during times of hot and dry weather.

Monsanto had been trying to charge a premium for both products -- $75 per bag of SmartStax seeds [actually $74, but what the heck] and roughly the equivalent of $10 per bag of RoundUpReady seeds [again, they mean RoundupReady 2 Yield] -- but farmers have blanched at those prices, especially given the sharp run-up generally in the cost of crop seeds even amid the recession.

Further, growers have called into question the yield promises made by Monsanto for those two seed types.. RoundUpReady [once again, they mean RR2Y], first sold before last year's planting season, performed disappointingly in 2009, which the company has acknowledged. As for this year, seed dealers and analyst say that Monsanto hasn't provided much third-party data validating the high-yield claims of either RoundUpReady [RR2Y] or SmartStax, heightening skepticism among farmers.

"They didn't really have any supportive data out there," one dealer in Illinois told TheStreet on Tuesday. "It was just kind of sold as it was better."

As a result, Monsanto has started reducing those prices in an effort to gain "market penetration," to use the company's phrase, and entice reluctant growers into buying the new seeds.

Don Carson, an analyst at UBS, wrote in a research note on Monday that Monsanto had begun to "heavily discount" SmartStax seeds, according to a survey of dealers he'd recently conducted.

Analysts and investors had been roundly discouraged by Monsanto's perceived stubbornness in holding to its earlier growth targets. That has changed.

Rentschler called Monsanto's conference call on Wednesday morning "cathartic" and "necessary."

"When you boil it down, it's quite positive," he said.

Trading in Monsanto shares was frantic Wednesday, with the stock moving from red to green and back to red, as investors attempted to come to grips with the revisions and what it means for the valuing of Monsanto equity. Late in the session, the shares were trading at $68.30, down $1.23, or 1.8%. Volume reached 30 million shares, almost five times the daily average turnover in the name.

During the conference call, Hugh Grant, Monsanto's energetic Scotsman CEO, went on to make further growth projections -- he said he now believes that the company's earnings per share could grow at a compound rate of between 13% and 17% [see #msg-48717801 for the new non-GAAP EPS guidance] -- despite having just been forced to throw out the company's earlier guidance.

Another reversal was inherent in Monsanto's profit-growth revision: Stiffer competition from other crop-seed providers appears, in part, to have forced the company's hand.

This despite the fact that Monsanto faces a civil antitrust lawsuit from rival DuPont (DD), which makes Pioneer brand bioengineered seeds, and a widely reported investigation by the U.S. Justice Department into anti-competitive behavior in the seed industry, which everyone understands is an investigation into Monsanto specifically. Some estimates say that Monsanto controls more than 80% of the bioengineered corn and soybean markets.

Sell-side stock analysts generally defend Monsanto against anti-competitive charges. The DoJ and the Department of Agriculture are hosting a series of meetings in the farm belt this year to discuss the agriculture business and alleged monopolistic practices there. "While we expect the remaining four ... meetings to generate considerable headlines," said UBS's Carson in his note this week, "they should not materially affect [Monsanto's] clear competitive lead in current and prospective ag biotech traits and in molecular breeding."

"There's plenty of competition," said Morgan Joseph's Rentschler, who also farms corn and soybean on a plot of land in southeastern Indiana. "It's a new reality." Farmers have "lots of alternatives. They don't have to have this stuff shoved down their throat."

"You have to approach people in a certain manner," Rentschler went on. "Hopefully that's a message that Mr. Grant has gotten."‹