Monsanto Company (MON) is an agricultural focused company. It is the largest producer of genetically engineered (GE) seed in the agricultural chemical industry. Their business works to meet the needs of farmers through two business segments: Seeds and Traits and Agricultural Productivity.
Global food demand is rising due to growing population, which will drive demand for agricultural inputs such as fertilizers, genetically modified seeds, and pesticides. The world's population is expected to reach 9.7 billion by 2050.
According to Transparency Market Research, the global commercial seeds market is expected to increase from $34.50 billion in 2011 to $53.32 billion in 2018. The bio-seeds market will reach $30.21 billion in 2018 from $15.60 billion in 2011. Increasing population with decreasing arable land is driving demand for bio-seeds. Monsanto's corn business is its largest crop business and one of the most significant sources of growth. In the GM seeds category, the commercial corn market is expected to grow at a CAGR of 10.6% from 2012 to 2018. As the world's largest producers of genetically modified seeds, the company is well positioned to benefit from the growing seed market.
During the last fiscal year, Monsanto spent more than $1.5 billion on researching new tools for farmers. The company concentrates the vast majority of its research-and-development (R&D) efforts on new biotech traits, elite germplasm, breeding, new variety and hybrid development, and genomics research. Monsanto sets an annual 10% of sales budget for R&D. Their importance on R&D sets the tone for the company as a whole. It will remain the leader in farming technology because of the importance of R&D. The huge budget for research department will also keep the company ahead of competition for years. Only large, greatly profitable companies like Monsanto has the ability to make large annual investments into R&D on a regular basis. Its main competitive strategy is to have the most advanced technology.
Over the past few years, Monsanto acquired a number of companies and made strategic alliances with many companies to enhance its market share. Recently, it acquired the Climate Corporation for 930 million. The acquisition will combine The Climate Corporation's expertise in agriculture analytics and risk-management with Monsanto's R&D capabilities, and will provide farmers access to more information about the many factors that affect the success of their crops. Similarly, Monsanto established a strategic alliance with Novozymes to transform research and commercialization of sustainable microbial products that will provide a new platform of solutions for growers around the world.
With these acquisitions and alliances, Monsanto would be able to build a stronger platform to promote the company's brand image and further strengthen its market position and customer base. The company will continue to diversify and expand operations which allow them to eliminate even more competition.
Monsanto has extended their presence in many international markets. It has strong potential growth opportunities outside of the U.S. The company is well established in developing countries where most of the future growth in this industry will come from, and this gives them an edge over its competitors. It has good growth potential over the long term, particularly in countries like India, China, and Brazil, where the population is increasing and agricultural production methods need to be updated. Brazil is one of the major market for Monsanto where genetically modified planting will increase by 6.8% this season.
Monsanto's management has been successful in allocating and using their assets and has created a strong long-term balance sheet. The company's financial health is much better than its competitors like Syngenta AG (SYT). Monsanto has a debt-to-equity ratio of 15.7x, much lower than Syngenta of 41x. The low debt/equity ratio indicates that Monsanto has been very successful management of debt levels. Monsanto's gross profit margin is 51%, as compared to Syngenta of 48%. Monsanto has a high Return on Assets (ROA) of 10.92%, which ensures that there are no structural flaws in the company. It is a company that extended their top-line and bottom-line figures even during the recession.
One risk associated with Monsanto is large numbers of lawsuits. It has been sued, and has settled, multiple times. Basically, there is a vast list of lawsuits and accusations about the company. Monsanto has been criticized by many environmental groups and in many rural areas, as a result it has a very poor brand outlook. A few months back, American Farmers launched two class action lawsuits against Monsanto following the discovery of unapproved genetically modified wheat growing in the Pacific Northwest. Farmers said that the company's negligence has ruined sales. These litigations and criticisms definitely hurt the company's performance and are an issue they have dealt with for many years.
Monsanto is a stable company who continues to improve their business techniques and practices. Through its ongoing commitment to research and development and assertive capital allocation, the company has positioned itself to grow and remain dominant for years to come. With the strategic acquisitions and alliances, the company is on the right track to further strengthen its presence in the industry through diversification. Due to the large number of lawsuits, Monsanto has a very poor public image and increasing legal costs, therefore I recommend that investors should hold this stock.