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Although we don't currently own the stock, we have found ourselves coming to the defense of agriculture giant Monsanto (MON) quite a bit. To many investors, Monsanto is everything that is evil to farmers and crops, given that the company sells genetically enhanced seeds, which are seen as "unnatural." To the rest of the world, however, this company is a wealth-building operation.

The stock is up almost 15% on the year and is now resting at a 52-week high. And if fiscal second-quarter earnings results were any indication, not only is Monsanto on-track with its long-term plans of feeding the world, but this company also plans to feed the Street's insatiable appetite for growth. While this is certainly encouraging news for investors, it's worth asking, if now is not the right time to step away from the table and take profits.

Planting the seeds of doubt Q2

Regardless of what Monsanto's 52-week high status may presume, this is not by any means a flawless operation, and there are certainly some aspects of the company's performance that investors need to pay attention to. For instance, although the company has been growing at an impressive rate, Monsanto's performances in soybeans, which dropped 5% in the first quarter, has been unimpressive.

Likewise, segments such as vegetables and cotton, although they've been steady, Monsanto has shown an over-reliance in corn, which has been the company's strongest growth segment. While this sort of detail has often escaped those that love this company, the bears, however, have constantly attacked these weaknesses.

To that end, Monsanto has added motivation to reverse these trends and demonstrate the strength of its global business. The company posted a 15% year-over-year increase in revenue, which arrived at $5.5 billion - beating consensus estimates by as much as 5%. Again this is where Monsanto's global corn business, which surged 16% on the year, stepped up.

However, for investors who are now looking for value in a stock that is already at its 52-week high, the relative performance here is critical. In that regard, Monsanto's results (on balance) are not exactly "rooted" in strength. In fact, more scrutiny would reveal that pretty much every other segment, aside from corn, were meager at best - relative to expectations.

Time for better or more "Productivity"

While we do offer caution about the company's relatively weak sequential performance, we were impressed by the 37% growth in Monsanto's "Productivity segment." This is an important side of the business that investors should seriously pay strict attention to, especially since "Agriculture Productivity," which grew sales to more than $300 million this quarter, consists to crop protection and herbicide products such as weed-killer Round-up. These are products that have raised controversy and the ire of environmentalists.

Nevertheless, this remains a strong, yet underrated side of Monsanto's operation. That said, Productivity still only accounts for 20% of Monsanto's overall Q2 sales. The company, however, has acknowledged the importance of the Productivity segment since it now comprises of 3% more of the company's revenue when compared to last year. Here again though, we were discouraged by the sequential decline - albeit due to seasonality.

Be that as it may, this is certainly a situation that bears watching as Productivity also impacts profitability. For instance, Monsanto has had historically strong gross margins. In this quarter, however, margins were not as impressive. And if not for the strong margin performance in Productivity, which shot up by almost seven points year over year, the stock would likely have gotten punished.

The weak margin in seeds, which declined 140 basis points, contributed to a 90 basis point decline in overall gross margin. Relative to expectations, this was not a nightmarish performance, however. But it should give investors pause when timing the right entry for this stock. The good news is that, segment-wise, operating income did well - growing 15% year over year. Again, Monsanto has the Productivity segment to thank. To that end, it would certainly be encouraging if the company can grow this business to the extent that Productivity can comprise of (at least) 30% of overall sales.

Are there growth prospects?

While Monsanto has undoubtedly taken a market-leading position in seeds and agriculture technology, the company still has to contend with formidable rivals such as DuPont (DD) and Syngenta (SYT). Although Monsanto has garnered the lion's share of the media coverage, this is not by any means Monsanto's market to lose. These rivals are no slouches.

In fact, DuPont's main source of profitability has been its seed business, which recently grew 14% year over year and is outgrowing Monsanto. However, the seed business has not been as profitable to DuPont as it has been for Monsanto. This is despite DuPont's better growth. But DuPont also has a much underrated AG chemical business, which is providing the company with excellent returns on capital and is arguably better than both Monsanto's and Syngenta.

At some point, though, Monsanto will be forced to reverse its seed weakness, especially if DuPont shows it can continue its momentum. Unfortunately, Monsanto's management didn't offer glowing guidance for the coming quarters. In that regard, it's worth noting to Investors that the next two quarters (Q3 and Q4) are typically Monsanto's strongest in terms of performance.

To that end, this is where Monsanto's agriculture pipeline sets the company apart, especially on the strength of the Productivity segment, which is growing at close to 40%. The question here is - how well can management shore up the margins in this business? Granted the seven-point improvement in margin was impressive this quarter. But this segment is known to be very volatile.

We've already said this, but it's worth repeating here. If management can continue to keep costs down while growing the Productivity business to comprise of (at least) 30% of overall sales, Monsanto's valuation would not look as demanding as it does today. Along similar lines, management's main priority in the next 6 to 12 months should be to fix the company's seeds business, which still produces solid incremental value - around 28% average. Here too, Monsanto needs to work to fight off DuPont, which is just as efficient in realizing this value.

Where's the stock going next?

Given our concerns about Monsanto's current valuation aside, we're not going to pretend by any stretch that the company's fiscal second-quarter report was anything but solid. Nevertheless, interested investors want to know where the stock is heading next. With shares having reached a new 52-week high of $107.73 and given the fact that the stock trades on a daily volume of 2.5 million shares, this is not an easy question to answer, especially since the stock is already up almost 15% on the year, while sporting a P/E (22) that is five points above the S&P 500.

That said, there are plenty of factors to support a higher share price. First and foremost is Monsanto's strong revenue growth. But the fundamentals such as a solid financial position with reasonable debt levels are very appealing. What's more, it's hard to not be impressed with the company's record of earnings per share growth and notable return on equity, which sits at 20%.

Still, we would love the stock more if the operating cash flow as a percentage of revenue were stronger, currently at 21.7%. By contrast, DuPont and Syngenta carry a cash-flow to revenue of 11% and 9% respectively. The good news though is that Monsanto outperforms both companies from a debt-to-cash ratio, which is at two-to-one, while both Syngenta and DuPont carry more debt than they have cash on the books. In that regard, we feel that Monsanto's overall strengths outweigh the company's weaknesses.

That said, at a P/E of 22, the stock is not cheap when compared to Syngenta's P/E of 20 and DuPont's 10. And when we broaden the scope to include other companies such as BASF (OTC:BASFY), which carries a P/E of 14, shares of Monsanto don't look as appealing. But when factoring fiscal 2014 earnings-per-share estimates of $5.29, the P/E drops to 20, which is two points below Monsanto's historical average.

Time to plant optimism

Monsanto's fiscal 2014 estimates do not represent a significant undervaluation. But it still represents some potential value. But by looking at Monsanto's fiscal 2014 estimates, investors can say that the stock is (at worst) fairly valued at today's prices. But here again, if management can grow the Productivity side of the business to comprise of a bigger portion of Monsanto's sales, while also growing Productivity at a rate of better than 40% with strong margins, fair value can reach $120. But these are some big "ifs." But in the near-term $110 to $115 is also very likely. In fact, we'll draw a "line in the dirt" and predict it.

Source: Can Monsanto Harvest More Shareholder Value?