The Rising Influence of Rising Affluence

[ilpapa]

Prior to the event this WSJ reporter was in a show-me mood

This is the big one for Monsanto Co.: The agribusiness firm on Wednesday should report not only what is typically its most profitable quarter of the year but, if analysts are right, its best ever.

Even a company that got its start making artificial sweetener can't sugarcoat the number shareholders care most about, though: its share price. Monsanto trailed the S&P 500 by 13 percentage points in the past year and by 114 points in the past five.

Great results for the fiscal second quarter through February probably won't change that trend on their own. Half of Monsanto's earnings reports over the past decade, including many that beat expectations, were followed by share-price declines.

For what it is worth, analysts estimate Monsanto earned $3.04 a share, versus $2.74 in the same period a year earlier. Lately, though, much of the gain has come from Monsanto's "Agricultural Productivity" segment, which is separate from its larger business of seeds and traits. Though the company doesn't offer details, improved results are likely due to herbicide Roundup. Its impact may be fleeting.

A true blockbuster at one time, Roundup lost patent protection several years ago. Instead of flailing, though, Monsanto's business bloomed over the ensuing period as prices and demand for Roundup-resistant seed varieties rose. The expiration next year of its U.S. patent for Roundup-resistant soybean seeds is therefore cause for at least mild concern.

True, Monsanto has shifted customers to ostensibly superior varieties with extended patents, and most of its growth now comes from South America. Even so, the prospect of farmers legally reusing their genetic seed traits without paying Monsanto highlights one of the myriad technological and intellectual-property risks it faces.

Monsanto's compelling macroeconomic story—a hungry world craving more protein will need to dramatically boost crop yields—is counterbalanced by these microeconomic risks. Since 2009 or so, this has kept the stock's forward price/earnings ratio right around 20 times. That is half the peak the stock fetched in late 2007 when soaring developing-world meat consumption was a blockbuster investment thesis on Wall Street.

Buoyant crop prices and solid earnings may spark renewed interest in Monsanto, but tread carefully. Paying any more for the company's earnings today could leave a bitter taste for investors tomorrow.