MONSANTO CO. $86 (New York symbol MON, Aggressive Growth Portfolio; Manufacturing & Industry sector; Shares outstanding: 534.6 million; Market cap: $46.0 billion; Price-to-sales ratio: 3.4; Dividend yield: 1.7%; TSINetwork Rating: Above Average; www.monsanto.com) is a multinational firm that sells technology-based agricultural products, such as genetically modified seeds, to farmers, grain processors and food companies. Overseas markets account for about 45% of its revenue.
Monsanto has two business segments. Its Seeds and Genomics division, which supplies 73% of its total revenue, makes genetically modified seeds for corn, soybeans and other crops.
The company gets the remaining 27% of its sales from its Agricul- tural Productivity division, which makes herbicides for farmers under the Roundup brand. Roundup accounts for about 10% of Monsanto’s overall sales. The company also makes lawn and garden herbicides for consumers.
Monsanto’s revenue rose 3.2%, from $11.4 billion in 2008 to $11.7 billion in 2009 (fiscal years end August 31).
However, revenue fell 10.4% in 2010, to $10.5 billion. That’s mainly because competition from generic herbicides lowered sales of the company’s Roundup products. Revenue rebounded to $11.8 billion in 2011, and to $13.5 billion in 2012.
Earnings jumped 30.1%, from $3.39 a share (or a total of $1.9 billion) in 2008 to $4.41 a share (or $2.4 billion) in 2009.
Monsanto laid off workers and closed plants in response to the sharp drop in Roundup sales. Severance payments and other costs related to these cuts lowered its 2010 earnings to $2.41 a share (or $1.3 billion). The restructuring has reduced Monsanto’s yearly costs by $300 million to $340 million.
Restructuring savings fuelled gains
Higher sales and savings from the job cuts increased the company’s earnings to $2.93 a share (or $1.6 billion) in 2011, and to $3.79 a share (or $2.0 billion) in 2012. Monsanto recently took back some of the funds it had set aside to settle a lawsuit. If you exclude all unusual items, it would have earned $3.70 a share in fiscal 2012.
The company spent $1.5 billion (or 11.2% of its revenue) on research in 2012. That’s up 9.5% from $1.4 billion (or 11.7% of revenue) in 2011.
This spending gives it a steady stream of new products that are helping it maintain its high market share. For example, Monsanto recently developed new cucumber seeds that are more resistant to mildew than conventional seeds.
As well, the company will soon launch a new type of corn seed that is more resistant to drought. Tests show that these new seeds deliver an extra 5 bushels per acre, or a gain of about 7% compared to other modified corn seeds.
In addition to developing new products, Monsanto is using its strong earnings to make acquisitions.
It recently paid $210 million for Precision Planting, an Illinois-based firm that makes seed-planting machinery. Precision’s products help farmers maximize their crop yields because they space out seeds evenly and at a uniform depth. Depending on how well this business performs, Monsanto may have to pay an additional $40 million.
Strong balance sheet is a big plus
The company can easily afford to keep increasing its research spending and making acquisitions. Monsanto’s long-term debt of $2.0 billion is a low 4% of its market cap, and it holds cash of $3.6 billion, or $6.71 a share.
Monsanto recently raised its quarterly dividend by 25.0%, to $0.375 a share from $0.30. The new annual rate of $1.50 yields 1.7%.
Environmentalists continue to oppose genetically engineered foods. As well, the company faces a rising number of competitors, including large firms like Du- Pont and Syngenta AG.
However, Monsanto recently won a patent infringement lawsuit against DuPont concerning genetically modified seeds that let crops tolerate Roundup.
As a result, the court ordered DuPont to pay Monsanto $1 billion in damages. The lawsuit win underscores the company’s leading position in seed development; it could also make it harder for other companies to develop competitive products.
This victory is part of the reason why Monsanto’s stock is up 23% since the start of 2012.
Reasonable p/e for a market leader
The company expects to earn between $4.18 and $4.32 a share in fiscal 2013. The stock trades at 20.2 times the midpoint of that range. However, that’s still a reasonable price-to-earnings ratio in light of Monsanto’s high research spending. Moreover, new markets in Eastern Europe, Latin America and Asia enhance its long-term earnings potential.
We’re adding Monsanto to our Aggressive Growth Portfolio. It’s a buy
