Monsanto's Future Looks Promising

|
 |  About: Monsanto Company (MON), Includes: DD, SYT
by: Adnan Riaz

Summary

Growing population will increase the demand for agricultural inputs.

Expiration of patents could affect its immediate revenue forecasts.

Long-term opportunities will come from Monsanto’s record R&D pipeline.

2013 was a good year for Monsanto Company (NYSE:MON). Shareholders of the company must be quite happy as its share price moved more than 24% last year, from $93 per share to more than $116 per share. The company has also shown decent growth in its top and bottom lines, and delivered a high return on equity.

Due to growing population, global food demand is increasing. Increasing food demand will benefit Monsanto, as this will drive the demand for agricultural inputs such as pesticides, fertilizers, and genetically modified seeds. The world population is expected to increase from 6.9 billion in 2010 to 8.3 billion in 2030 and 9.1 billion in 2050. By 2030, food demand is predicted to increase by 50% (70% by 2050).

According to a research report, the global commercial seeds market is expected to increase from $34.5 billion in 2011 to $53.32 billion in 2018. During the same period, the bioseeds market will increase from $15.6 billion to 30.21 billion, growing at a CAGR of 9.9% from 2012 to 2018. Rapid development of bioseeds, also known as Genetically Modified (GM) seeds is one of the primary factors affecting the growth of the commercial seeds market. Monsanto has served as a pioneer in the agricultural chemicals industry for over a century. As the industry pioneer and market share leader, it is uniquely positioned to profit from these robust macroeconomic drivers, and continue to lead a growing industry over the next several years.

Monsanto has two main business segments: Seeds and Genomics, and Agricultural Productivity. The company's agricultural productivity segment will face stiffer competition in the next few years as its key patents will be set to expire. Like the patent for Roundup Ready soybean will expire in 2014, which means Monsanto will no longer collect trait fees. The technology will be accessible from others in the market and farmers will have a chance to purchase elsewhere, possibly for a lower price. The company believes that expiration of such patents will affect margins on original products. Patent and license expirations make product sales volumes and revenues hard to sustain in the long-term. However, I believe Monsanto will sustain market share by innovating and reaching developing countries.

Each year, Monsanto spends 9%-10% of its revenue on Research & Development (R&D) because success in the market is tied to being the first mover with the most superior technology. The company's management has expressed that they will increase Research and Development efforts in the coming years. By continuing to invest an increasingly larger proportion of funds into research and development, it stands poised to produce new and innovative seeds, traits, and other products that will create organic revenue growth and further cement its market share. Critical to the long-term success of Monsanto will be its strong pipeline. The company announced earlier this year in an annual R&D update that a record 29 of its products progressed in its pipeline.

Other long-term opportunities will come from the increasing biotech adoption on a global scale. According to The International Service for the Acquisition of Agri-Biotech Applications (ISAAA) report, more than 18 million farmers in 27 countries planted biotech crops in 2013, reflecting a five million, or three percent, increase in global biotech crop hectarage. Of the countries planting biotech crops, eight are industrial countries and 19 are developing countries. For the second year, developing countries planted more hectares of biotech crops than industrialized countries. As the EU and other developing regions continue to reassess the benefits of genetically modified crops, Monsanto will be well-positioned to gain from widening acceptance. Finally, the global demographics are unequivocally supportive of industry growth. As the leader by market share, the company will continue to exploit its competitive advantage of first-to-market so as to capture enormous profit in the midst of an exponentially growing industry.

Monsanto's primary rivals are DuPont (NYSE:DD) and Syngenta AG (NYSE:SYT). Over the past few years, both companies have invested millions of dollars in their own seeds and traits businesses. Some of the key statistics for Monsanto and its competitors are given below.

MON

SYT

DD

Industry

P/E (NYSE:TTM)

22.25

21.75

21.29

24.58

Forward P/E

18.70

n/a

13.76

n/a

Qtrly Revenue Growth (yoy):

6.60%

6.10%

-2.70%

45.73%

Qtrly Earnings Growth (yoy):

12.60%

-34.70%

-57%

43.28%

Profit margin

17.49%

11.19%

8.24%

15.84%

Return on Assets

10.80%

7.14%

5.56%

12.70%

Return on Equity

19.96%

18.03%

20.32%

17.05%

Current ratio

2.29

1.54

1.88

0.99

Total Debt/Equity ratio

22.80

33.73

68.83

22.16

Dividend Yield

1.50%

2.20%

2.70%

2.01%

Payout ratio

32%

47%

57%

13.27%

Click to enlarge

Source: Yahoo Finance

The chart represents that Monsanto's stats are almost as good or better than its competitors. Monsanto's return on assets ratio is higher than Syngenta and DuPont. Higher return on assets means the company is more efficiently using its assets which is a sign of great management. Also, its quarterly revenue and earnings growth is highest among the three.

Monsanto's current ratio is much higher than Syngenta and DuPont. A higher current ratio means the company is more capable of paying its obligations. Monsanto also has done a good job managing their debt. Its total debt/equity ratio is 22.80x, the lowest among the three. Lower values of debt-to-equity ratio are favorable indicating less risk. A lower debt/equity ratio means that a company is using less leverage and has a stronger equity position. With low debt levels, Monsanto will have the opportunity to compete in future global M&A and develop more innovative biotechnology products for farmers.

Looking at dividends, Monsanto has maintained a dividend since its incorporation in 2000 and has continually increased its dividend during periods of economic growth and stability. Although, its dividend is not attractive when compared with DuPont and Syngenta, but I believe its leading market share, continued R&D pipeline, and stable financial reward investors through real stock price returns.

Bottom Line

Future of Monsanto looks bright. The company is well-positioned to benefit from growing commercial seeds market. Through its ongoing commitment to research and development, the company will continue to dominate a market that it essentially created more than a decade ago. In my opinion, Monsanto is a strong buy right now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.