Since I first published my bullish article on DuPont (DD) here, the stock has gained by 6.2%. At this point, I find that the value gap no longer warrants opening a long position. Monsanto (MON), which has soared by 14.2% for the year to date, has similarly past its attractive entry point. Based on my multiples analysis and DCF model, I share the reserved sentiment on the Street but prefer DuPont.
From a multiples perspective, DuPont is the cheaper of the two and more well diversified. It trades at a respective 13.4x and 11.6x past and forward earnings while offering a dividend yield that is 180 bps higher than that of its competitor at 3.3%. Monsanto trades at a respective 25.2x and 19.6x past and forward earnings, but offers less volatility with a beta of 0.9 versus 1.5 for its competitors. Analysts currently rate shares of both companies between a "hold" and a "buy".
At the recent first quarter earnings call, Monsanto's CEO, Hugh Grant, noted a solid start to the year:
"The first quarter was a strong quarter. As the first checkpoint, the early strength validates both the business momentum behind our confidence in our 2012 growth and the drivers that create our opportunity beyond this year.
At this point, 3 things strike me. First, our pipeline progress continues to move ahead and be a competitive differentiator, and that's even more important as we put an even greater focus on delivering yields to our growers. Second… the growth in Latin America isn't just an important financial contributor. It's an increasingly important strategic growth driver. With the proof points in hand, we can confidently see the game-changing effect that the Latin American opportunity can have in driving growth over the midterm horizon. And third, our early orders in the U.S. underscore that the momentum that we started to rebuild in 2011 is carrying into 2012".
EPS of $0.23 was almost 50% more than consensus, as the top-line grew by 33% while margins rose by 720 bps. Much of this strength was due to strong results in Latin America, which featured a sales growth of 46%. Greater Australian cotton seed prepayments further drove value creation. The high corn demand in Argentina and Brazil provides for a significant market penetration opportunity. And with a stellar management that is capable of building customer loyalty, if not total dependency, these regions will provide more free cash flow generation for the years to come. The only problem is Europe will be soft in the next quarter and the expected declines in planted acreage will slow down the cotton and soy markets.
Consensus estimates for Monsanto's EPS forecast that it will grow by 18.6% to $3.51 in 2012 and then by 16.5% and 15.2% more in the following two years. Assuming a multiple of 22x and a conservative 2013 EPS of $4.03, the rough intrinsic value of the stock is $88.66, implying 10.8% upside. If the multiple were to decline to 17x and 2013 EPS turns out to be just 3.7% below consensus, the stock would fall by 16.3%. Accordingly, risk outweighs reward in this instance.
DuPont not only has strong upside, it also has lower downside. During the third quarter, all segments posted double-digit growth rates. Latin America volumes grew by 17% with a strong start to the planting season. And Pioneer performance in North America makes ag giant Monsanto look soft. Yield advantage in corn grew by 1.8 bu/ac to 2.6 bu/ac in 2011 while the sill yield advantage declined by only 0.2 bu/ac to 1.4 bu/ac. Domestic performance has been stronger than Monsanto of late - and this is just in the ag business. DuPont is focused on chemicals, which will have a sharp rise when the industrial economy picks back up.
Consensus estimates for DuPont's EPS forecast that it will grow by 18.4% to $3.92 in 2011 and then by 8.7% and 12.7% in the following two years. Assuming a multiple of 13.5x and a conservative 2012 EPS of $4.19, the rough intrinsic value of the stock is $56.57, implying 14.5% upside. Modeling a CAGR of 13.2% over the next three years and then discounting backwards by a WACC of 9% yields an even larger figure at $60.88.