By Fani Kelesidou
There is much talk around fertilizer producers these days. The sector attracts investors' interest as fertilizer sales volumes are expected to surge next year. Weather-related conditions, especially in the U.S., resulted in bottom-low crop yields. Crop nutrient demand has historically multiplied in years following droughts. Higher crop prices and the resulting increase in acreage are the main drivers of growers' demand for fertilizers.
St. Louis-based Monsanto Company (NYSE:MON) is one of the giants in the industry. The company originally operated as a chemical company. Currently, Monsanto serves as a leading agricultural giant. Its primary focus concentrates on seeds and crop protection products and introducing biotechnology innovations. Monsanto was the first to achieve the genetic modification of crop seeds in 1996. In 2011, the company initiated operations on the Flora Corn Breeding Station. This facility is just one out of many of the company's facilities, which utilizes the latest breeding techniques. The company holds a diverse product and service portfolio which includes conventional and biotech seeds, crop protection solutions, and advanced technologies.
Recently, Monsanto reported its preliminary financial results for the year ended August 31, 2012. Considering that in 2012 farmers witnessed one of the most difficult growing seasons on record, Monsanto performed strongly. The company holds a solid financial position supported by stable operating cash flows.
Monsanto concluded fiscal year 2012 with ongoing EPS growth of 27 percent. For the full fiscal year, net sales were $13.5 billion, up by 14 percent compared to fiscal year 2011. The accelerating trend in net sales was primary attributed to increased global corn seeds and traits revenues. Moreover, there was a significant improvement in soybean seeds and traits revenue in Brazil and the U.S.
For the reported period, Monsanto's net income totaled $2 billion, an increase over fiscal year 2011 net income of $1.6 billion. Operating expenses remained relatively unchanged and close to last year's levels.
From operating activities, the company generated approximately about $3 billion in net cash. Free cash flow was a source of $2 billion for fiscal year 2012. Free cash flow followed a modest upward pace indicating Monsanto's commitment to pursuing opportunities that enhance shareholder value.
Overall, Monsanto has some positive fundamentals. Compared to its peers the company stands at a relatively decent fundamental state.
Over the past five years, revenue grew by 14.33 percent. Compared to Potash Corporation of Saskatchewan, Inc. (POT) and its 5-year average revenue growth of 80.48 percent, Monsanto appears weak. However, Monsanto exceeds in terms of financial discipline. It has a long-term debt-to-equity ratio of 0.17 and a current ratio of 2.30. For Potash, the same variables stand at 0.39 and 1.46, respectively.
EPS this year followed a positive trend of 27.5 percent, which is above the peer median of 17.4 percent. For the last three years EPS yoy grew by 47.26 percent, suggesting that Monsanto's growth and profit prospects are stable. Monsanto's return on assets of 10.10 percent exceeds the industry's average of 8.4 percent. This performance implies a relatively sound management efficiency and sustainable operating returns.
Monsanto holds a comparatively firm gross margin of 56 percent versus the industry's average of 32 percent indicating a solid control of expenses. Combined with the company's strong operating cash capacity, Monsanto acts as a viable player of the Agricultural Chemicals Industry.
Stock Performance and Valuation Metrics
Technically, Monsanto looks strong. Throughout 2012, the stock has performed nicely by returning more than 25 percent. Currently, Monsanto is priced at around $89, about 3.5 percent below its 52-week range of $92.2. Compared to its peers' valuation metrics, Monsanto could be considered a little bit pricey. The P/E ratio stands at 23.57 while forward P/E ratio is 17.77.
The stock is trading 3.5 times sales with a PEG ratio above the norm of 1. However, Monsanto has a long way to go. The latest closing price was 9.51 percent up from the SMA200 signaling bullish momentum. Analysts are overall positive about the stock's future performance suggesting an average mean target of $98 or at least 10 percent upside potential. In addition, Monsanto is a solid dividend payer with a yield of 1.70 percent. Considering the relatively low payout ratio of 33.34 percent, there is a lot of room for dividend growth.
Monsanto is on the comeback from previous aggressive pricing strategies that slowed its profitability. However, the company remains a premier player in agricultural biotechnology. It possesses a strong pipeline of seed products, which promise significant gains. Moreover, it has an impressive track record of delivering innovations to the marketplace. Recently, Monsanto and Complix NV announced their collaboration on the evaluation and development of Complix's protein technology in agriculture. Complix is a biopharmaceutical company focused on the discovery and development of protein therapeutics. This collaboration represents the first application of Complix's technology in agriculture.
2013 is expected to be a fruitful year for the company. Monsanto estimates gross profit from the Seeds and Genomics segment to be in the range of $6.65 billion. Gross profit for the Agricultural Productivity segment is expected to reach billion. Overall, there are early market indications of increased demand for crop protection and nutrient products. Weather-related conditions have negatively impacted this year's crop yields. As a result, demand for crop-yielding products in anticipation to the next planting season is going to be robust. Monsanto is well-positioned to benefit from these conditions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Fani Kelesidou, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.