Monsanto (NYSE:MON) is an agricultural company whose primary business is supplying seeds, traits developed through biotechnology, and crop protection chemicals. The company currently employs 21,183 and has 404 facilities in 66 countries, a truly global presence.
Monsanto seems to me an excellent purchase and is supported by macro and micro tailwinds.
The main macro driver is high soft commodity prices which incentivize farmers to maximize yields. In order to do this farmers will invest in the best seeds, traits and fertilizers in order to achieve this and maximize profits, Monsanto is positioned perfectly to benefit from this. There is a risk of course that soft commodity prices could fall however this is unlikely. Soft commodity prices are strongly supported by growing demand, global population is growing and land is a finite resource, as a result prices should remain elevated. Climate change has also had a positive impact on prices. Droughts and floods have become more apparent in recent years, dramatically decreasing supply and thus by the simple laws of supply and demand increasing price. Shifting climate patterns should support prices.
Digging into the company's financial statements highlights some fantastic trends for the business and the strong financial health it is currently in.
Top of Form
Years ended Aug. 31
Bottom of Form
Net Income Attributable to Monsanto Company
Diluted Earnings per Share
Other Selected Data
Free Cash Flow
Source: Annual Report
The trends here are extremely positive for investors. This business is growing sales, increasing earnings per share, and also increasing free cash flow, which should support dividend payments. Capex is fairly consistent - Monsanto needs fixed and work capital investment in order to continue to grow the business, improve products and penetrate new markets.
The company also has a strong balance sheet. Short-term risks are minimal for the firm highlighted by a current ratio of 2.28 in 2012, an increase from 1.86 in 2011. Short term debt has decreased from 2011 to 2012, although long-term debt has increased. However, with current market conditions making it extremely cheap for companies to borrow debt should not always be viewed as a negative. Monsanto's Return on Equity is over 17%, and so they will be borrowing low and generating a high return on this.
The global reach of the business provides it with access to growing and developing markets. Emerging market farmers are beginning to invest more capital into their production and this includes expenditure on high quality seeds and fertilizers. Capex on tractors and machinery can be too expensive for emerging market farmers and high quality seeds are a cheaper alternative but can still increase output.
Patent laws have also allowed Monsanto to operate in monopolies, which should support profits over the medium term which means earnings will be robust to say the least.
Hopefully this helps to paint a picture of what a great business Monsanto is. It is at the forefront of a growing industry and has exhibited a great ability to grow sales and earnings. One added bonus is that management also has a history of returning money to investors through dividends - the current yield is 1.4% - not great but for a growth stock a nice add on. A recent statement from Monsanto also shows that the firm is keen to return cash to investors:
"We are going to move toward returning more of the cash we generate toward our owners," (Monsanto Chief Financial Officer Pierre Courduroux)
When investing what we want is to purchase great businesses at the right price, and not overpay. Monsanto has had a fantastic year, with the share price rising 36%. Monsanto currently trades on 22x earnings and a leading P/E of 22.7x. My view on this is that the stock is not cheap but still a great buy, I believe the company has a great opportunity to grow earnings at a high rate over the long term. This was recently highlighted by the company upgrading 2013 earnings following a better start to the year than expected.
Any pullbacks, which are caused by the macro environment and not due to fundamentals, should be seen as buy in opportunities.