Biotech Values

[DewDiligence]

MON: Here’s the summary from Morgan Stanley’s report on 4/7/10
immediately following MON’s release of its quarterly numbers and
webcast slides, but before the actual CC. (The bracketed italicized
text below are my own annotations.)

›Resetting Expectations: Now a Mid-teens EPS Grower

Analysts: Vincent Andrews, Megan Davis
Rating: Outperform
Price Target: $106

In conjunction with F2Q10 results, Monsanto has walked away from its prior F2012 gross-profit goals and now intends to be a mid-teens EPS grower. As we wrote on Monday [i.e. 4/5/10], we think that this is the right move for the company and the stock. Additionally, Monsanto now expects F2010 EPS to come in at the low end of its $3.10 to $3.30 guidance range. In general, we are not surprised by the overall outcome, though we were hoping for more detail on future growth than it appears we are going to get from the slide deck. [On the CC itself, in response to Mr. Andrews’ question, MON’s CEO told investors to expect 13-17% average annual EPS growth.] Given the complexity of the issues and the limited time available for discussion today (a quarterly conference call), we imagine the company will provide more detail in future presentations. Net, we expect the stock to be largely flat today as investors recalibrate expectations and models going forward.

F2010 includes 1) $100-150 million in trade make-goods in Roundup that should not recur next year (this number could be higher now with lower Roundup guidance for the year); 2)~$240 million of winter production costs that seem unlikely to fully recur in F2011 given a change in strategy [this is the cost of producing new RR2Y soybean varieties in Chile during the Northern Hemisphere winter and shipping them to the US, which MON did on an “emergency” basis in FY2010 to increase the varieties of RR2Y available for planting in the US]; 3) $54 million in one-time costs associated with SKU-rationalization in corn; and 4) the company has committed to an incremental $175 million of SG&A restructuring saving in F2011 [i.e. FY2010 SG&A will be higher than the FY2011 figure by this amount]. All in, these items represent ~$800 million, which translates to ~$0.75 of EPS. We hope the call will provide some clarity to this issue.‹