Monsanto: Turn Rising Food Prices Into Profits

Monsanto (NYSE: MON) makes genetically modified [GM] seeds. GM seeds are designed to exhibit certain desirable traits. For example, one of Monsanto's most popular current products is Roundup Ready corn. Roundup is MON's popular brand of weed-killing herbicide; Roundup can be applied directly to Roundup-Ready corn without negatively affecting the corn plant. Meanwhile, the Roundup will kill all of the weeds in the cornfield, boosting corn yields per acre.

MON makes seeds designed to offer protection against diseases, pests, weeds and environmental conditions for all sorts of crops. Even better, MON is a leader in stacked traits -- seeds designed to exhibit more than one beneficial trait. For example, MON's triple-stacked corn protects against rootworm, corn borers and offers Roundup resistance. By stacking multiple traits, MON is able to significantly boost corn yields per acre; in addition, some of these pest control traits reduce the need to apply pesticides to crops.

MON's main competitive advantage lies in its GM technology. The company has developed or purchased some of the most desirable GM traits; those traits are proprietary, and as a result, competitors can't copy MON's technology. MON is also a leader in stacking -- by the end of 2010, MON will introduce its SmartStax corn with a total of eight desirable traits. The launch will take place at least two or three years before the company's main rivals introduce similar products.

In addition, MON is developing some new, promising traits such as drought resistance. Given water shortages across many key crop-producing regions of the world, this promises to be a truly blockbuster trait for MON.

As for growth, global agriculture markets have been on fire recently, with the prices of wheat, soybeans, corn and other basic food commodities surging to new multi-year highs. There are two main drivers of this trend: rising consumption of agricultural commodities in emerging markets and increased consumption of crops for biofuels production. As consumers' incomes rise in the developing world, meat consumption is soaring, powering demand for basic crops like soybeans and corn to use as feed. And new biofuels mandates in the U.S. and E.U. are pushing demand for ethanol and biodiesel; this is also boosting demand for agricultural commodities.

As a result, farmers are looking to maximize their yields per acre to improve production and take advantage of higher prices -- MON's products are one of the only ways to boost yields.

MON's triple-stacked corn continues to gain share in the U.S., and that trend should continue over the next few years, as few competitors offer a competing triple-stacked product line. And MON also has room to expand in other key agricultural markets such as Brazil and China where GM seed penetration is lower than in the U.S.

MON is a market leader in the GM seed business, and the firm is at least two years ahead of its competitors with new stacked products. As a result, MON should see growth topping +37% over the next few years. Meanwhile, the company trades at just over 30 times 2009 earnings estimates; it's rare to see a market leader like MON trade at a discount to its long-term growth rate.

Disclosure: No position

Comments

[sebrock]

first, I'll say that I really like Monsanto (right now I have an Iron Condor on since I think the stock is going to trade in a range between 100-135 for the next month or so) but how could you in all seriousness call 37% a long term growth rate. 3 years is not long term.

[bkinn]

MON is a great company, however the info you provided is old story. MON has indeed been developing GM grains for many many years. However, there are some countries that will not accept GM corn etc. imports. There has been a lot of discussion on GM products over the years, and while the saying has been "if they are hungry enough, it won't matter", there are a number of issues surrounding GM organisms that should be examined closely before we simply turn our food sources over to MON's "Frankenstein grains".

[User 59050]

i think 3 years IS long term . . .great article.

[Jake2]

Nothing new, nothing interesting.

[Mike Stathis]

While I appreciate the author’s commentary, I’d like to add a few important points:

(1) I think this material is a bit outdated – by at least 3 years. If you take a look at the stock price since then as well as the current food problems, especially with corn, ethanol, etc., it appears to me that some less informed investors might rush into this stock thinking it will soar from here.

(2) I did not see any treatment of risk or any of the controversial issues that are rising in momentum. Without this, there is no way an investor can make a reasonable decision. Namely, many nations have banned Monsanto’s GM crops, which puts a nice cap of growth. As well, even in the USA, many consumers are protesting the safety of GM-crops, and there is significant scientific evidence that these concerns have merit. At some point, growth will be limited to population growth plus some premium. While that point may not occur for a while, the lack of global acceptance of GM crops is concerning.

Finally, the future of patent laws for biotech is highly uncertain. In support of the author’s estimates (although not mentioned), the fact is that the USPTO has permitted Monsanto to establish a monopoly in GM crops due to its world-leading number of biotechnology claimed patents, at nearly 700. This bodes well for them. However, the laws surrounding biotechnology intellectual property are still way up in the air and things could change at any time. If the USPTO ruled that Monsanto was no longer able to claim ownership rights to GM, this could turn the company upside down overnight. As you will recall, prior to 2003, MON was struggling for growth, and the stock bottomed in the low teens.

In conclusion, it's easy to be bullish on a stock that's had a great run, especially when the dumb money has recently bought it (i.e. the clowns who watch Cramer, who apparently recommended the stock a month ago). But the sophisticated investor will weigh all of the data - the pros and cons - and look at current market risk as well as the run that stock has made prior to making the determination whether it fits his or her investment horizon and risk tolerance. It looks as if bkinn understands this philosophy.

[blackhorse]

Old news and the easy money has already been made. Time to take profits, while maintaining base position to leverage any remaining upside in a good story. "bulls get rich, bears get rich and hogs get slaughtered". I don't watch Cramer, but he should have been recommending two years ago instead of a month ago. He's a bit over the edge and late these days. I feel sorry for people that substitute solid research by watching him on TV every night.