Monsanto — How to Play Wednesday’s Earnings Report

Agricultural products company Monsanto (NYSE: MON) reports earnings for the
quarter ending Aug. 31 on Wednesday before the market opens. With the market in
free fall, the news is likely to move the stock significantly one way or
another. Commodity prices have been on a roller coaster in 2011. Fears of
inflation during the first part of the year pushed prices higher. Today, it is
the threat of deflation with global economies faltering. Which view the needle
falls toward will depend partially upon Monsanto's report and guidance for the
future. Given the focus of the company on agriculture, shares should be trading
more like a defensive stock irrespective of economic activity. Instead, Monsanto
has been quite volatile. During the past three quarters, Monsanto has exceed
average Wall Street estimates of earnings: During the quarter ending May 31, the
company benefited greatly from increasing prices. Profits in that period beat
analysts expectations by 16 cents per share. As a result of that performance,
one would think estimates for the Aug. 31 period would be on the rise. Instead,
they have slipped by three cents per share during the past 90 days. The company
now is expected to lose 27 cents per share. For the full year also ending on
Aug. 31, Monsanto is expected to make $2.87 per share. In the following year,
that number increases by 19% to $3.42 per share. At current prices, Monsanto
trades for 21.5 times current-fiscal-year estimated earnings. With the dramatic
shift in view regarding the global economy, MON shares took a step back since
July 1 the stock is down 14.25% since then. That is slightly better than the
S&P 500, down 16% in that time frame. Click to Enlarge Despite recent losses,
the stock still is up 28% during the past 12 months: When market commentators
suggest that earnings estimates are likely too high, Monsanto comes to mind. A
three-cent drop in the estimate for the quarter ending Aug. 31 is paltry. The
stock is holding up better than most thanks to what still are expected to be
strong growth numbers in the coming year. I'm not convinced. Defensive stocks
like Monsanto are by their nature slow-growing animals. Growth near 20% should
be viewed as an anomaly that is not likely to be sustainable. Monsanto is at a
crossroads. Shares have yet to lose full steam and could plummet if earnings do
not meet expectations. The bigger issue for Monsanto will be guidance. A likely
reduction in guidance for the coming fiscal year should be met by harsh selling
in the market. What upside potential is there for the stock? It is difficult to
paint a picture of what moves Monsanto higher here. I would look to sell this
stock short in advance of earnings. The odds would favor a decline in share
value after a report that fails to impress. Other companies reporting results
this week include Marriott International (NYSE: MAR ) , Ruby Tuesday (NYSE: RT
), Helen of Troy (NASDAQ: HELE ) and Constellation Brands (NYSE: STZ ).