One of the biggest stories so far in 2011 is undoubtedly the strength of commodity prices across the board. While oil and precious metals have hogged much of the spotlight thus far, key staple products ranging from corn and wheat to sugar and cocoa, have also gained a tremendous amount so far this year. This has largely been due to weather although a number of key geopolitical factors have helped to boost investor sentiment regarding these important commodities as well.
This trend has put companies in the agribusiness sector into focus as many investors are looking for the industry’s products, be it machinery, seeds, or potash, to help boost yields for farmers across the world, allowing them to take advantage of high prices for a variety of crops. Arguably, the most famous company in the industry is Monsanto (MON) the Saint Louis, MO-based seed giant, which is expected to post earnings before the bell today, shedding further light on the sector [Three ETFs To Invest Like Marc Faber].
The company is expected to post earnings of $1.85/share for the quarter on revenues of $4.15 billion. This compares relatively favorably to the year ago period in which the company reported $1.7 a share in profits on revenues of just under $4 billion. It should also be noted that the spring quarter report tends to be the most important for the company, as the majority of the firm’s revenues and profits are made during this period. This is likely due to seed orders for the spring season, so investors should pay particularly close attention to today’s report for further guidance on the health of the industry going forward.
Additionally, with the recent runup in valuations across the sector, expectations are likely to be extra high for MON, putting added pressure on the company to deliver solid results to investors. “Valuations look rich with the stock trading at 25.6x current-year estimates of $2.85 per share.” wrote Gary Cassady of Benzinga. “This could be a factor as to how the stock reacts after the earnings announcement. It will be harder for the bulls to push it up due to its lofty valuations, while bears will pounce on any perceived weakness to drive the stock lower. Monsanto has missed estimates in two of its previous four quarters.” [see Creative ETF Ideas To Hedge Against Global Unrest]
Due to this key earnings report, as well as the high level of interest in the sector as of late, we look for the Market Vectors Agribusiness ETF (MOO) to be in focus throughout today’s trading session. The fund allocates just under 8.7% of its assets to Monsanto, enough to put the giant in the top holdings spot of MOO. In addition to MON, the fund holds 45 other securities that also target the agribusiness industry and as a result, could be heavily influenced by today’s report. Particularly, investors should keep an eye on other top components such as The Mosaic Corp, Syngenta, and Agrium, as these companies are more likely to feed off of MON’s results thanks to their similar focus [see more of MOO's holdings].
In light of last week’s crop report and continued worries about global supplies in a variety of soft commodities, Monsanto’s products should be in high demand in many of its key target markets. Yet, this is a double-edged sword; while demand is likely to be high, expectations will also be through the roof, putting pressure on the company to deliver later today. Should MON manage to meet lofty expectations, look for MOO to surge during the session, especially if commodity prices rise as well. If, however, investors remain unimpressed with the company due to the high expectations and the company’s already lofty valuation, MOO could take a significant tumble in Wednesday trading, putting a damper on the industry’s recent surge [also see IndexIQ Launches Global Agribusiness Small Cap ETF].
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Disclosure: No positions at time of writing.