Agro Sector Ideas

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Monsanto, Potash Corp, Mosaic -- >>> 3 Agricultural Giants: Which One Would You Buy?



By Victor Selva

May 3, 2013

Tickers: MON, POT, MOS


http://beta.fool.com/victorselva/2013/05/03/3-giants-in-the-agricultural-sector/32795/?source=eogyholnk0000001



In the growing agricultural products market, there are some companies which just can't be ignored. As emerging economies, especially India and China, demand growing volumes, we will look into the growth prospects of the main players: Monsanto (NYSE: MON), PotashCorp (NYSE: POT), and Mosaic (NYSE: MOS).

The leader

Monsanto is a global agricultural product provider that leads the global seed segment. After delivering a strong fiscal 2012, the company recently released results for Q2 2013 and has not disappointed investors. Earnings per share were up 19% year over year to $2.73. Given the encouraging results, most analysts (Morningstar, Barrons, WSJ, Zacks) recommend buying the stock, especially as it trades at a P/E of 22.02, close to its historical low.

Monsanto projects that by the end of fiscal 2013 in August, EPS will reach $4.40-$4.50, upgrading their estimates from $4.30-$4.40. After the first quarter’s earnings report, the company had done the same. This reveals the company’s greater expectations for the year based on these preliminary results.

Corn seed and traits sales grew considerably over the past year, especially in North and Latin America. Revenue from this source was 16% higher than in 2012’s second quarter, reaching $3.28 billion, and driving overall revenue higher by 15.2%. This trend in corn is expected to continue at least until the end of fiscal 2013, with Brazil and Argentina providing the most interesting prospects.

In order to further increase profitability, Monsanto has widened its product offerings by signing a multi-year licensing contract with E. I. du Pont de Nemours and Company. As a result of this agreement, the company will receive annual fixed royalty payments until 2017 and continued minimum payments until 2023.

The Agradis and Rosetta Green acquisitions should increase earnings as well.

Despite the advice to buy, certain risks should be taken into account. For starters, the fact that the company operates worldwide leads to two main issues: 1) the segment is highly competitive internationally, forcing Monsanto to increase production costs in order to produce better, high yielding seed varieties; and 2) as it operates in many countries and regions, the firm is exposed to all kinds of risks related to local political, economic, and currency fluctuations. In addition, the reported revenue from soybeans of $677 million registered a decline of 17%, year over year.

A leading stock in the fertilizer sector

PotashCorp, the fertilizer giant, has divided analysts’ opinions lately. While some experts expect the company to deliver a performance similar to the wider U.S. equity market in the short-term (6 to 12 months), others assume outperformance, thus recommending investors to buy the stock.

In spite of this disagreement, several positives can be found in PotashCorp. Last month, the company announced its results for 2013’s first quarter. Sales volumes increased 83% to 2.2 million tonnes compared to the year ago figure of 1.2 million, and potash sales volume also increased 78%, mainly driven by demand from China and India.

EPS beat the $0.59 analyst consensus, coming in at $0.63 a share; same was the case with revenue which was $2.1 billion, ahead of the $1.82 billion consensus estimate. Given this situation, the outlook seems promising for PotashCorp.

One of the company’s main strengths lies in its diversified product offerings. Nitrogen has proved to be a more resilient and profitable nutrient than potash and phosphate. Given the fact that over 30% of this firm’s revenue during Q1 came from nitrogen, and that demand of this product is strong (over 60% of the fertilizers consumed in the U.S. use nitrogen) and rising, future revenue should be driven by this product.

Also encouraging are the company’s worldwide investments that have consolidated its dominance in the largest potash markets worldwide. PotashCorp owns 22% of China’s leading fertilizer distributor, Sinofert, 32% of Chilean nutrient and lithium firm, Sociedad Quimica y Minera,14% of Israel Chemicals, and 28% of Arab Potash Company in Jordan.

Finally, the firm’s financials are quite strong. It has industry leading net margin of 26.2%, ROE of 21%, ROA of 11.4%, and ROC of 24.8%, as well as EPS and revenue growth of 21.4% and 19.8%, respectively.

Dividend yield of 2.1% is the highest offered by the company throughout its history and one of the best yields in the industry.

It is trading at a reasonable P/E of 16.6x, which is below the 20.9x industry average.

On the downside, asset growth of 14.8% annually has been considerably higher than the revenue growth rate average of 6.3% over the past five years. The weakening in potash demand in the U.S. could seriously affect the company’s finances too.

A stock to bear in mind

Just like in PotashCorp’s case, analysts can’t fully agree on Mosaic, the world´s biggest phosphate producer. Although the company is not particularly strong and last quarter´s results reported very little growth, some recent insider stock purchases have taken place at Mosaic.

On the upside, fiscal third-quarter results included a 9% growth in gross profit year over year to $568 million. Similar was the case with net income, which came in at $345 million, up 26% (YoY). Similar to PotashCorp´s situation, the increased Chinese and Indian potash demand drove this item´s sales volume up 62% (YoY). The vertical integration in its phosphate production also provides the company with some extra advantage, given the fact that rock prices are reaching historical highs and Mosaic mines its own phosphate.

However, the decrease in potash and phosphate consumption worldwide has considerably affected this company that does not deal in nitrogen, and has left it considerably behind PotashCorp in both growth and margins.

Bottom line

It has become clear that Mosaic is not a top investment pick. Monsanto and PotashCorp, however, are. Although both offer considerable upside, I'm inclined towards PotashCorp. Trading at $41 and with a target price of $53, it provides a very interesting entry point, especially given the 11.9x Forward P/E.


With less and less arable land available around the world, increasing yields from existing plots could become vitally important to keeping up with expected population growth. Cheap and effective fertilizers could be the key to achieving this goal. As the global leader in potash production, PotashCorp has established several barriers to entry that make it nearly impossible for competition to break through. Click here now to access The Motley Fool's premium research report that covers precisely what these barriers to entry are and details several other key reasons why PotashCorp presents such a compelling investment opportunity today.

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