Monument Circle Acquisition Corp (MON)

[DewDiligence]

Monsanto Is Sowing the Seeds of Future Growth

[This article is from the current issue of Barron’s. Please see the quiz in #msg-39687555 and my prediction in #msg-39841050, which are germane to the analysts’ EPS forecasts for FY2011 and beyond. For related stories, see #msg-41324910, #msg-38262415, #msg-39551239, #msg-42530685, #msg-40779236, and #msg-41098804. For MON’s financial results and pipeline info, see #msg-42341821 and #msg-43483542.]

http://online.barrons.com/article/SB125937686827167525.html

›NOVEMBER 30, 2009
By KOPIN TAN

Planting seeds is an act of faith, an investment in a future you can't yet see. That's something Monsanto shareholders need to keep in mind.

The agricultural giant is weathering an uncharacteristic dry spell: The 2009 stock-market rally that has lifted everything seems to have shortchanged agriculture, and falling grain prices limit farmers' willingness to pay up for crop seeds. At the same time, Monsanto's profits from selling herbicides have plummeted, while spending is increasing as the company prepares to launch two crucial new batches of genetically modified corn and soybeans.

As a result, the once highflying shares are more earthbound of late. At 80.87, the stock fetches 24 times the depressed profits Monsanto (ticker: MON) is expected to earn in 2010, well below multiples topping 43 merely two years ago. Shares have rallied just 15% over the past year, lagging behind gains of 19% for fertilizer stocks and 18% for agricultural-product companies -- not to mention 30% for the broad market.

Yet Monsanto shareholders who do keep the faith will be rewarded. The stock price may swing with short-term fluctuations in corn or soy prices, "but the embedded value of its premier franchise and its intellectual property shouldn't," says stockholder Harry Rady of Rady Asset Management. "So when the stock trades down with grain prices, I view that as an opportunity." Morgan Stanley analyst Vincent Andrews reckons Monsanto's core business is worth $88 a share and its pipeline of new products adds another $17, which would peg shares at $105, or about a third higher than recent levels.

Before the shares can realize that potential, investors accustomed to steroidal growth from the world's largest producer of genetically tweaked seeds will have to cope with some unfamiliar events: Analysts expect profits to fall 25% in 2010. Blame falls to Monsanto's smaller herbicide unit, which despite rising sales volume has had to slash prices of its premium "Roundup" brand to fight cheaper, generic competition from places like China. This could drive the unit's gross profits below $700 million from $1.84 billion this year.

But seeds are being sown, quite literally, for future growth. Among the new technology Monsanto is marketing is SmartStax corn, which is loaded with the broadest array of genes available for fighting pests both above and below ground and for tolerating pesticides, as well as Roundup Ready 2 Yield soybeans, which promise more beans per pod [#msg-43483542].

Success will boost Monsanto's dominant seeds business, swelling its share of company profits to 85% by 2012 from roughly two-thirds today. More important, it will help win back investors frightened by the weakening herbicide unit and refocus attention on Monsanto's stranglehold on the planet's food chain. The St. Louis company may have been called a factory for "frankenfoods," and criticized for its overzealous policing of its intellectual-property rights, but Monsanto remains the name most money managers associate with global agriculture -- and it's the stock they lunge at to exploit any shortage in the global food supply.

And that macro trend shows no sign of changing as the world grows ever more crowded -- and its people hungrier [the premise of #board-15787]. "Grain inventories are low worldwide, while demand continues to rise as developing countries get wealthier," says Joe Milano, who runs the T. Rowe Price New America Growth Fund (PRWAX), a major Monsanto shareholder. "The world is not blessed with an unlimited supply of water and arable land, and so farmers need better seed technology to improve crop yield" [see #msg-41324910]. And unlike fertilizer, the market for genetically tweaked seeds still is largely underpenetrated outside the U.S.

China, for instance, has 22% of the world's population but just 7% of its arable land and 8% of its water. China already has to feed 12.5 people per hectare of arable land, compared with just 1.7 in the U.S., and it is rapidly losing farmland to industrialization.

Morgan Stanley's Andrews figures Monsanto's seed business will grow at an 18% pace in the next three years, with new products, increased pricing and a growing market share.

One big concern is that Monsanto has failed to gain U.S. market share in corn and soy while rival DuPont's (DD) Pioneer seed business did [#msg-40779236]. But field trials show Monsanto's top three hybrids producing a higher yield of 10.6 bushels per acre compared with Pioneer's. That edge could help Monsanto in the future. Monsanto is expected to earn $4.40 a share in 2011 after a disappointing $3.29 in 2010 [these numbers refer to the fiscal years ending Aug 31 rather than calendar years—also see #msg-39841050]. That's a future worth investing in.‹