Investors Plant a Monsanto Seed for Future Portfolio Growth
Companies / Investing 2009 Feb 26, 2009 - 03:11 AM GMTBy: Oxbury_Research
I have a friend who really enjoys science fiction. I asked him the other day, “Do you ever watch anything besides the SciFi Channel?” He replied, “I do. I also watch CNBC.”
I know that my friend is not much of an investor so I asked him why the heck he watches this channel.
His response, “It's real-life time travel. These people still go ga-ga for technology stocks. They still wait with breathless anticipation for tech company earnings and announcements as if it was 1999.”
The saying “out of the mouth of babes” relates to a child's perspective on the world being clear and pure. It seems to me that the same holds true for “out of the mouth of novice investors” like my friend.
I think my friend is right – this group is still living in the past and treating most technology companies as if they walked on water. CNBC also tends to dismiss all natural resource companies as “only” mere commodity producers.
Many technology companies, such as semiconductor companies, actually produce a “commodity” which can easily be replicated. An emerging market country can throw up a plant to produce commodity chips in a very short span of time.
Yet, many so-called commodity companies actually produce a commodity which is in short supply and that has increasing demand coming from the emerging market countries. In my opinion, many seem to be confused as to the definition of a “commodity” producer.
Agriculture Play - Monsanto
One of the many sectors that is usually ignored is agriculture. We seem to have forgotten the basic fact that everyone on the planet needs to eat. Maybe the CNBC cafeteria only serves Blackberries, iPods and iPhones…
One of the major companies in the agricultural sector is Monsanto (MON). Monsanto, best known for its genetically modified seeds, is the world's largest seed company. The company's business is structured into two segments – Seeds and Traits along with Agricultural Productivity.
Monsanto's Seeds and Traits segment consists of the company's global seeds and traits business, and genetic technology platforms – including biotechnology, breeding and genomics.
Monsanto's Agricultural Productivity segment consists of crop protection products and residential lawn-and-garden herbicide products. Among these products is Roundup, which is the world's best-selling herbicide.
Monsanto – a Hybrid Company
Monsanto produces hybrid seeds but the company itself is something of a hybrid. The company is both a low-tech company (herbicides) and a high-tech company (seed and plant genomics).
Last year's soaring crop prices meant very strong demand for branded herbicide products, such as the company's Roundup products. The price for branded herbicides actually pushed above $20 per gallon. In spite of nearly a decade of generic competition, Monsanto's Roundup herbicide products remain top-selling brands.
The company's herbicide division is expected to see declining sales in upcoming years. However, growth in no-till farming, in which farmers douse fields with herbicides rather than plow them to control weeds, should keep the demand for herbicides from dropping too steeply.
Monsanto, however, is now focusing on their seeds and plant genetics segment. The company has stated that this area will be the key fundamental driver to the company's future growth. This segment now accounts for 62% of the company's gross profit, which is up from 45% just five years ago.
Monsanto's consistent investment into research and development, which represents nearly 10% of net sales, has benefited the company and maximized returns. With this commitment to R&D, the company's seeds and traits business have grown at a compound annual growth rate of 28% on a gross profit basis from 2001 through 2008. This segment is expected to maintain an approximately 18% compound annual growth rate in its gross profit through fiscal year 2012.
Two new technologies from Monsanto's R&D pipeline are on the verge of commercialization. These are SmartStax corn and Roundup Ready 2 Yield soybeans. These products are genetically-modified crops and are intended to be higher-yielding while also being more resistant to herbicides and drought. These crops also have “custom” genes for weed and bug control.
Biotech crops, of course, still remain controversial in some parts of the globe. These types of crops are still banned in the UK and France. However, there are now 7 EU countries which are using genetically-modified crops. In 2008, the United States planted about half of the world's acreage, followed by Argentina and Brazil. These countries do plant genetically-modified crops, so Monsanto's products are being used in most key agricultural areas of the globe.
In fact, it was the company's performance in Argentina and Brazil that allowed Monsanto to post a very strong overall first-quarter performance. The continuing strong demand in South America helped the company to report that first-quarter profits had more than doubled. This demand also allowed the company to lift their earnings outlook for the full year.
I believe that popular resistance to biotech crops may be softening as projected global food demand grows. Higher-yielding crops mean lower food prices. Economic hard times may make this prospect much more appealing.
Monsanto – a “Monster” Stock
I find it fitting that in what so far seems to be another “monstrously” bad year for the stock market, that the producer of what its critics call “Frankenfoods” has done well. At the time this article was written, shares in Monsanto had risen by more than 13% for the year while the S&P 500 has fallen by more than that percentage amount.
The 52-week range for Monsanto's stock has been between a high of $145.80 and a low of $63.47 per share. So far in 2009, the stock price has been bouncing around between the mid-70s and the mid-80s.
For investors looking to play future global growth and who want to own a “technology” stock, they need look no further than Monsanto. Any purchase price between the 50% technical retracement level of $73 and $80 per share is surely reasonable.
Regards,
By Tony D'Altorio
Analyst, Oxbury Research
Tony worked for more than 20 years in the investment business. Most of those years were spent with Charles Schwab & Co., both as a broker and as a trading supervisor. As a supervisor, he oversaw, at times, dozens of employees. Tony was trading supervisor during the great crash of 1987 and was responsible for millions of dollars of customers' orders.
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
© 2009 Copyright Oxbury Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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