9 Pages Posted: 30 May 2017
Monsanto is facing an uncertain near-term financial outlook, and this case challenges students to generate an operating forecast (income statement and balance sheet operating accounts). The case naturally lends itself to sensitivity analysis related to sales growth assumptions. Suitable for MBA and undergraduate learners, it covers the basics of forecasting without introducing the complexities associated with financing. A teaching note is available.
Rev. Aug. 18, 2010
By October 2008, the economic crisis that had begun in the early part of the year was in full force. Originally considered a Wall Street problem initiated by a collapse in the mortgage-backed securities market, the crisis seemed likely to spread economically to Main Street businesses and consumers and affect both developed and emerging economies. Most importantly, the credit markets were seizing up, and the intensifying credit squeeze was spreading beyond the financial sector. Earlier in the month, even firms in the usually unexciting agricultural chemicals industry (firms providing fertilizer, pesticides, herbicides, and seeds) were suddenly facing serious concerns about their future prospects: Mosaic saw its stock price sink 41.3% on disappointing earnings news while Potash Corp. and Agrium Inc. lost 27% and 24.2%, respectively, as Merrill Lynch analysts downgraded the firms from “buy” to “underperform.”
Within the agricultural chemicals industry, Monsanto remained relatively unscathed. The same analysts that downgraded Potash and Agrium to “underperform” only downgraded Monsanto from “buy” to “neutral.” Its stock price declined, of course, but only by 16.2%—an amount that appeared modest given market conditions and the striking stock price declines at competing firms. Part of the explanation was the continued resilience of Monsanto's star product Roundup—an agricultural herbicide—which had experienced an increase in both volume and average selling price. In fact, during the second week in October, Monsanto announced its fiscal year 2008 results in which earnings more than doubled over the prior year (to $ 2.0 billion) based on a 36% increase in sales (to $ 11.4 billion).
Unfortunately, there were a number of reasons to believe Monsanto's relative good fortune might not last. Many observers felt the credit crisis might limit the ability of farmers to obtain loans for purchases of equipment, seeds, fertilizers, and pesticides. Monsanto revenue related to corn seed had doubled since 2005 largely due to farmers' shifting to corn as corn prices rose in response to demand for corn in ethanol production, but that demand was softening with a drop in oil prices and as the oil industry began to meet government-mandated targets for ethanol production. Sales of Roundup had increased partially in anticipation of a price increase, and that sales increase might not be sustainable. The end result of these developments was a high degree of uncertainty regarding near-term prospects for Monsanto. It was clear analysts were keenly focused on operating performance and a further recommendation downgrade was a real possibility.
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Keywords: forecast, financial statements
Suggested Citation: Suggested Citation
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