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Monsanto (NYSE:MON) recently reported its preliminary financial results for the year ended Aug. 31, 2012. In this article, CapitalCube will provide a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Monsanto's analysis vs. its peers uses the following peer set: BASF (BASF.PK), E.I. DuPont de Nemours (NYSE:DD), Dow Chemical (NYSE:DOW), Syngenta AG (NYSE:SYT), Archer Daniels Midland (NYSE:ADM), CF Industries Holdings (NYSE:CF), Bunge Ltd. (NYSE:BG), and FMC Corp. (NYSE:FMC). The table below shows the preliminary results, along with the recent trend for revenues, net income, and returns.

Annual (USD million)2012-08-312011-08-312010-08-312009-08-312008-08-31
Revenues13,516.011,832.010,502.011,689.011,365.0
Revenue Growth %14.212.7(10.2)2.932.7
Net Income2,039.01,605.01,105.02,098.02,007.0
Net Income Growth %27.045.2(47.3)4.5117.7
Net Margin %15.113.610.517.917.7
ROE %17.314.811.021.623.8
ROA %10.28.56.211.713.0

Valuation Drivers

Monsanto's current price/book of 3.9 is about median in its peer group. The market expects more growth from Monsanto than the median of its chosen peers (a P/E of 23.5 compared to a peer median of 15.2) and to improve its current ROE of 17.3%, which is around peer median.

The company's relatively high profit margins (currently 15.1% vs. peer median of 8.8%) are burdened by asset inefficiency with asset turns of 0.7 times compared to the peer median of 0.9 times. Overall, this suggests a margin driven operating model relative to its peers. Monsanto's net margin continues to trend upward and is above (but within one standard deviation of) its five-year average net margin of 14.1%.

Economic Moat

Changes in the company's revenues are in line with its peers (annual revenue changed by 14.2%), but its earnings performance has been better -- its annual earnings changed by 27.0% compared to the peer median of 17.4%, implying that it has better cost control relative to its peers. Monsanto currently converts every 1% of change in revenue into 1.9% of change in annual reported earnings.

Monsanto's return on assets is above its peer median both in the current period (10.2% vs. the peer median of 8.4%) and also over the past five years (9.9% vs. the peer median of 7.3%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's comparatively healthy gross margin of 56.4% vs. the peer median of 31.8% suggests that it has a differentiated strategy with pricing advantages. Furthermore, Monsanto's bottom-line operating performance is better than the peer median (pre-tax margins of 22.1% compared to the peer median of 11.4%), suggesting relatively tight control on operating costs.

Growth and Investment Strategy

While Monsanto's revenue growth has been around the peer median in recent years (5.0% vs. 4.3%, respectively, for the past three years), the market gives its shares a higher-than-peer-median P/E ratio of 23.5. The market seems to see faster growth ahead.

Monsanto's annualized rate of change in capital of 6.0% over the past three years is less than its peer median of 9.2%. This investment has generated a peer median return on capital of 12.1% averaged over the same three years. The median return on capital investment on a relatively lower investment suggests that the company is under-investing.

Earnings Quality

Monsanto has reported relatively strong net income margin for the last 12 months (15.1% vs. the peer median of 8.8%). This margin performance combined with relatively high accruals (7.5% vs. the peer median of 2.8%) suggests possible conservative accounting and an understatement of its reported net income.

Monsanto's accruals over the last 12 months are positive, suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median, which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

Monsanto distributes agricultural products to farmers, including crop-protection chemicals, herbicide, seeds improved through biotechnology. It operates its business through two segments namely: Seeds and Genomics, and Agricultural Productivity. Through its Seeds and Genomics segment, the company produces seed brands, including DEKALB, Asgrow, Deltapine, Seminis, and De Ruiter, and it develops biotechnology traits that assist farmers in controlling insects and weeds. The Agricultural Productivity manufactures Roundup and Harness brand herbicides and other herbicides. It also provides other seed companies with genetic material and biotechnology traits for their seed brands. The company was founded by John F. Queeny in 1901 and is headquartered in St. Louis, Mo.

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Source: Earnings Analysis: Monsanto