October 2, 2013 6:59 pm

Monsanto: seeds of doubt

Earnings growth is good but capital investments make it pricey

It is nice to have something to distract investors from weak quarterly earnings. The bad news for Monsanto is that its diversion was a $900m acquisition of a data analytics start-up that is expected to cut 14 cents out of next year’s earnings.

For its fiscal fourth quarter, the seed maker reported a loss of 47 cents a share, a few pennies more than Wall Street expected, sending its shares down a tick or two. For the year, earnings did sprout 20 per cent, and the company predicts another 9 per cent to 13 per cent next year. But even that growth is not coming cheap. Excluding the just-announced acquisition of Climate Corp, capital expenditures will still leave free cash flow below the levels reached in recent years, an unusual pattern for a company that commands a premium valuation.

The global population keeps growing and prospering. That is good news for a company that offers corn and soyabean seeds along with herbicides to farmers. But the science involved is constantly advancing and there is plenty of competition from upstarts and large rivals such as DuPont and Syngenta. Monsanto spent $1.5bn last year on capital expenditures and research and development, a full fifth of sales. Free cash flow has been steady at about $2bn for the past three years. But with capital expenditures alone set to jump 50 per cent in 2014 to over $1bn, free cash flow, excluding the Climate acquisition, still drops to about $1.6bn.

Monsanto shares now trade at 11.5 times operating cash flow, exactly the midpoint of its valuation range since 2011. It has spent nearly all of free cash flow on returning capital to shareholders through buybacks and dividends. But its total shareholder return this year is just 13 per cent, below the overall market. And with an unspectacular 2014 forecast, Monsanto investors should not expect a bountiful harvest soon.

Email the Lex team in confidence at lex@ft.com

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