Monsanto: Sowing the Seeds of Love

Real-time Monetary Inflation (per annum): 8.0%

Agricultural giant Monsanto Co.'s (NYSE: MON) second-quarter profits beat analysts' estimates, giving the company's shares a 3.6% boost at this morning's opening. The world's biggest seed maker actually reported a 3.2% slippage from year-ago earnings, despite increases in corn and soybean revenues.

Positive earnings surprises are nothing new for the St. Louis, Mo.-based firm. Over the past four quarters, analysts have underestimated Monsanto's earnings per share, on average, by 35%.

Monsanto delivered net earnings of $1.97 per share in its second quarter. Excluding extraordinary acquisition and settlement costs, the company earned $2.16 per share. The green eyeshade set was looking for profits of $2.09 per share.

Monsanto's second-quarter results are usually predictive of the company's overall performance. Orders for spring planting are reflected in the quarter's seed revenues. This time out, Monsanto's soybean sales soared 35%, while revenue from seed corn jumped 19%.

Monsanto's also closely watched as a bellwether of the broader agribusiness sector's direction. The company makes up 7.7% of the Market Vectors Agribusiness ETF's (NYSE: MOO) market capitalization, making it the fund's fourth-largest component.

Monsanto has an outsized impact on the ETF's performance. Over the past year, the correlation between Monsanto's and the Market Vectors fund's performance was clocked at 79%.

 

Monsanto Co. (MON) Vs. Market Vectors Agribusiness ETF (NYSE: MOO)

 

Naturally, observers are wondering if Monsanto has more surprises in store and, if so, if that signals better times ahead for holders of the ag ETF. For its part, Monsanto's still looking for full-year profits of $4.40-$4.50 per share.

Both Monsanto and the entire ag sector represented by the fund have been languishing in a trading range since last fall. The Market Vectors ETF has, in fact, bumped up against overhead resistance at the $30-$31 level three times, most recently just last week. The technical momentum for another run at an upside breakout is building now. An encouraging sign is the upside crossover in the moving averages for the MOO/GCC ratio.

The ratio gauges the relative strength of the Market Vectors ETF against the GreenHaven Continuous Commodity Index ETF (NYSE: GCC), much as the GLD (NYSE: GLD) / GDX (NYSE: GDX) ratio (see "Gold Stocks' Time To Shine") plots bullion against gold mining stocks.

Since the GreenHaven portfolio is based upon futures, not stocks, the resurgent equity market is reflected in the MOO/GCC ratio's gathering strength. With the stock market wind, in part fanned by surprises from issues such as Monsanto, at the Market Vectors fund's back, the likelihood of a breakout run through $31 to the $38 level increases.

 

Monsanto Co. (MON) Vs. GreenHaven Continuous Commodity Index ETF (NYSE Arca: GCC)