Seed giant Monsanto (click ticker for report: ) reported slightly weaker than expected fourth quarter results. Revenue fell 6% year-over-year to $2.1 billion, which was slightly weaker than the consensus estimate. Monsanto’s loss, net of a restructuring charge, doubled to $0.44 per share, which was about a penny short of consensus expectations.
The fourth quarter is generally a time when the firm experiences losses because sales typically ramp up during planting season. SG&A and R&D accounted for 34% and 21% of revenue, respectively, during the fourth quarter compared to 19% and 12% during fiscal year 2012. Both of these numbers fell year-over-year, and Monsanto also managed to increase its gross margins by 100 basis points. Further, the firm generated $2 billion in free cash flow during 2012, compared to $1.8 billion during 2011.
Though Monsanto’s business looks fundamentally strong in light of 2012’s global droughts, the firm reported somewhat disappointing guidance. Earnings are projected to be $4.18-$4.32 per share, shy of the consensus estimate calling for $4.37 per share. Though Deere (click ticker for report: ) highlighted how strong farm balance sheets are over the summer, we think spending will remain constrained in light of broader economic problems. Several of Monsanto’s products provide farmers with superior yields, but investment could be weak as the macro outlook remains cloudy.
Still, we believe shares of Monsanto are fairly valued at current levels. The company operates like a pharmaceutical company—investing heavily in R&D hoping to make superior seeds that have patent protection. Therefore, we prefer the name to other agricultural input providers like Mosaic (click ticker for report: ) and Potash (click ticker for report: ). Regardless, we aren’t interested in adding shares to the portfolio of our Best Ideas Newsletter at this time.