Job Cuts Prop Up Monsanto Stock After Disappointing Earnings

Agricultural seed and genomics giant Monsanto (NYSE: MON) reported disappointing quarterly earnings yesterday, sending the stock down 4% at this morning’s open. However, by midday trading, Monsanto stock had recovered to break even. Investors appear to be giving Monsanto the benefit of the doubt, because the company promised to aggressively cut costs and return more cash to shareholders.
Still, Monsanto faces fundamental challenges in key businesses like seeds and chemicals. Cost cuts and stock buybacks will help lessen the effect on earnings per share in the near term, but those measures are short-term fixes. The company will need to come up with a longer-term solutions to grow revenue and profit once again.

Monsanto Posts a Loss On Falling Sales

For the fiscal fourth quarter, Monsanto posted a $495 million net loss, or $1.06 per share, compared with a net loss of $156 million, or 31 cents per share, in the same quarter a year earlier. Even when adjusting for one-time charges, the company still lost $0.19 per share. Analysts expected the company to lose just $0.01 per share for the quarter.
The Monsanto earnings report said revenue declined 10% to $2.36 billion. Again, that figure missed analyst expectations, which called for $2.89 billion of sales. The main reason for this is that Monsanto’s most important individual product, corn seeds, saw sales decline 5% to $598 million. But the weakness was broad-based. Its key chemicals operating segment, spearheaded by Monsanto’s Roundup weed killer, suffered a 12% sales decline.

Commodity Slump Weighs

One of the major reasons for Monsanto’s poor results is the collapse in commodity prices. Specifically, corn prices have collapsed in the United States this year, which has reduced farm incomes. That has led to lower demand for Monsanto’s genetically-enhanced corn seeds.
Corn prices have fallen due in large part to oversupply. Farmers are still trying to shed excess inventory from last year’s higher-than-expected corn harvest. This has led these farmers to allocate farm land to different crops this year, because they did not need to plant as much corn.

Monsanto’s Cost Cuts a Temporary Fix

In response, Monsanto announced it will cut 2,600 jobs as part of a major cost-savings initiative designed to keep earnings afloat. This amounts to a 12% reduction in the company’s workforce. Management expects this will save the company approximately $275 million-$300 million in annual savings by the end of fiscal 2017.
However, a company can only cut costs so much. And, it is worth noting that the up-front cost of the structural reorganization may reach $850 million to $900 million, which would offset several years of anticipated savings.
Investors appear relieved that the company is right-sizing its cost structure over the long term, and also likely perceive the share buyback announcement positively. In addition to its job cuts, Monsanto separately announced a new, accelerated $3 billion share buyback authorization.
As its growth has weakened, Monsanto is trying to return more cash to investors to keep them happy. Its huge buyback announcement comes only two months after the company increased its dividend by 10%. This represents the sixth dividend increase since the end of fiscal year 2010. Monsanto’s dividend has more than doubled in that time.

Management Reiterates Long-Term Growth

Still, management is confident that it can get long-term growth going again. Next year will be rough, as the company has cut its fiscal 2016 operating EPS guidance to a range of $4.44 to $5.01 per share, down from previous forecasts of $5.10 to $5.60. However, management reiterated its long-term objective of more than doubling core EPS from 2014 to 2019.
Investors appear to be willing to give management the benefit of the doubt for now, but this is something investors will need to closely monitor in the months ahead.

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