Recently, Monsanto (MON) has been on the decline. After reaching a 52-week high of $109, the company's share price fell to $95 in the last few months due to worries about the slowdown of the company's growth. As the company's valuation got to a very reasonable level, it might be time to initiate a position in Monsanto.
After posting a net income of $2.73 per share in the second quarter against the analyst consensus of $2.56 per share and $1.66 per share in the third quarter against the analyst estimates of $1.61, the company's shareholders are not satisfied with Monsanto's full-year guidance of $4.50-4.55 per share as the investors were looking for $4.60 per share.
Monsanto operates in a highly-regulated industry where a small mess-up can cause huge fines or huge losses of potential revenues. For example, last may, when a wheat farm operated by Monsanto in Oregon demonstrated an unauthorized strain of genetically engineered wheat, this caused Japan to cancel its orders and other Asian wheat importers such as South Korea, Philippines and China took a cautionary note of the incident. The European Union also initiated an investigation about the situation. The events didn't end there either, as several American farmers filed lawsuits against the company which might result in huge fines for Monsanto as we move forward. These developments triggered a sell-off in Monsanto's shares on a strong volume even as the company's management tried to brush off all the concerns by saying that the incident was isolated and the tests conducted showed nothing of concern. Later on, the Department of Agriculture ran its own set of tests and came to the same conclusion as Monsanto. Later on, Japan decided to restart its wheat imports from the US but this didn't bring back the investors who sold their shares when Japan canceled its previous orders.
Monsanto's Roundup Ready 2 soybean seeds are expected to gain a market share of 60-65% in South America by the end of the decade. If the company's estimates are anywhere near accurate, this will result in huge growth opportunities in the continent. These seeds require less pesticide and their yield is about 10% more compared to the seeds of the previous generation which are in the market today. In fact, Monsanto's first generation of soybean seeds already claim nearly 100% market share in countries like Argentina. South American farmers export much of their excess yield to China where there is an increasingly strong demand for these products.
After a few months of selling off, the company is finally at a valuation where risk is much lower than where it was a few months ago. Monsanto is still a growth company and it will continue to grow at double-digits for the foreseeable future. Between 2010 and 2012, Monsanto was able to grow its revenues from $10.48 billion to $13.50 billion while raising its net earnings from $1.09 billion to $2.04 billion. The company expects to earn roughly $2.40 billion this year and the analysts expect it to earn $2.86 billion in 2014 and $3.21 billion in 2015. Monsanto is looking at forward P/E ratio of 21 for this year, 17 for next year and 15 for 2015. These are pretty reasonable numbers for a company that's growing at a double-digit rate.
Monsanto's balance sheet shows $3.05 billion in cash and $2.22 billion in total debt. For a company of $50 billion, Monsanto's debt is pretty minimal and the company has enough cash to fund its $2 billion buyback program that was approved on top of the existing $1 billion buyback program from last year. The company is also scheduled to return about $920 million to shareholders in dividends in the next 4 quarters, which will result in a yield of 1.81% at the current price. Given the company's annual earnings above $4 per share, the dividend rate is easily sustainable.
Goldman Sachs believes that Monsanto is currently in the oversold territory as it adds the company in its "conviction buy" list with a price target of $122 per share. An analysis by Goldman Sachs points out that Monsanto was able to remain highly profitable even at times when crop prices were low. For example, in 2004, when the corn prices fell by 40%, everybody thought that Monsanto was going to suffer badly, but the company was able to boost its corn profits by 29% during the year.
As the world's population grows, the demand for food will keep increasing. This is especially true for the countries like China where industrialization is in process and people are able to afford more food than they historically were able to. Unfortunately, there isn't enough arable land, farmers or resources to feed everyone with organic food so the humanity will have to resort to genetically engineered/modified food for the foreseeable future. Of course Monsanto enjoys a bad reputation amongst many people (especially outside of the US) for patenting its seeds. Many people argue that living things shouldn't be patented because they are gift of nature (or a higher creator) to us. I can still understand if some people want to stay away from this company for personal or ethical reasons. As for fundamentals go, the company is in a good shape and it is likely to post strong results for the rest of the decade as a major player in the global farming industry.