It had been quite a downcast start to the third quarter earnings season following very disappointing earnings from Illumina, Adobe and Yum Brand. Then Moments ago agri-giant Monsanto made it four out of four when it reported a huge miss on both the top and bottom line, with Q4 revenue of $2.36 billion, far below the $2.79 billion consensus estimate and down 10% from a year ago. The EPS was likewise a disaster, which at at loss of $0.19 in Q4, was also far below the consensus estimate of ($0.03).Q4 EBIT tumbled to -$773 million, while full year EBIT was down 15% to $2.2 billion.
This is what the company justified this shockingly bad result:
Full-year net sales results were driven by the performance of the company’s Seeds and Genomics segment and licensing agreements, which were more than offset by foreign currency headwinds, declining corn acres and declines in glyphosate pricing.
Then there was the topic of cash flow: Monsanto was proud to announce that in 2015 it $3.1 billion in cash from operations, the same as in fiscal year 2014. Free cash flow was a source of $2.1 billion in fiscal year 2015, compared with a source of $959 million in fiscal year 2014. The fiscal year 2015 cash flow results primarily reflected the absence of The Climate Corporation acquisition and the BioAg Alliance with Novozymes.
So, great news right: the company was generating solid cash flow right. Well, yes, until one realizes that in 2014 MON repurchased $7.1 billion in stocks, and then another $835 million in 2015. In other words the company spent more than it generated in the past two years on buybacks.
Worse, MON spent $7.1 billion buying back stock at an average price of just over $115/share in 2014. Its stock is now $85, which as every Treasurer knows is a great way to generate a -25% return on cash investment...
... but to assure a huge grin on the faces of activist shareholders who were delighted to sell to the company at $125 last summer.
As for MON, we are happy that the company has not learned its lesson:
Monsanto plans to enter into a new $3 billion accelerated share repurchase program under its current share repurchase authorization, as it progresses toward its targeted capital structure. The company plans to begin the new accelerated share repurchase program in the near-term and complete it sometime in the next six months.
Because when all else fails, a short-term pop and a long-term drop is precisely what "activist shareholders" demand.
And as for all else failing, one just needs to look at the outlook:
- Monsanto expects to achieve ongoing EPS of $5.10 to $5.60 in fiscal year 2016.
This compares to consensus estimates of $6.22. What is to blame this time?
Ongoing EPS guidance reflects in part an estimated $0.35 to $0.40 of headwinds from currency, $0.50 to $0.85 of headwinds from Agricultural Productivity pricing declines and $0.20 to $0.30 from elevated cost of goods for corn and the anticipated launch costs of Roundup Ready® Xtend soybeans. EPS on an as-reported basis is expected to be $4.44 to $5.01 in fiscal year 2016, reflecting additional charges related to the first phase of announced restructuring actions.
So pretty much everything including central bankers.
It gets worse:
The company projects free cash flow in the range of $1.6 billion to $1.8 billion for fiscal year 2016. The company expects net cash provided by operating activities to be $2.7 billion to $3.1 billion, and net cash required by investing activities to be approximately $1.1 billion to $1.3 billion.
Consensus cash flow estimate: $2.56 billion. But at least more than all of the company's net cash will be used to fund the stock buyback.
And while Monsanto management is delighted to hand over all of its cash flows to investors (and management's equity-linked compensation bonus), there is something for workers too: a pink slip.
The plans also include an expected separation of approximately 2,600 employees over the next 18-24 months.
Which, incidentally, is what in the New Normal is called "growth."