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Monsanto Revamping For Bright Future

|Includes: Monsanto Company (MON)
Monsanto (NYSE:MON) was one of the hottest stocks last week, rising 9.7% due to the expansion into the wheat industry and executive insider trading. Monsanto is one of the largest agriculture companies in the world specializing in crop production and seeds. We believe the stock hit the lowest it has been since 2006 earlier in the month, when it was revealed that sales of one of their major products, Roundup weed killer, had collapsed due to cheaper generic brands. This may scare some investors, but Roundup is projected to only be 4% of gross profit by 2012, down from 30% in 2008. Monsanto is in the process of converting their business from a herbicide and seeds company to mostly a genetically altered seed company, which has a bright future. As I said earlier, Monsanto has expanded their crop venture to include wheat. They are already invested in corn, soy, cotton, and canola, but wheat is the second largest commodity crop, and with the population in China and India rapidly increasing, plus their major diet adjustments, the wheat industry should continue to grow. Let’s take a look at some figures of Monsanto. Here is a chart showing the change in net sales of their two basic segments:
 

 
 
2009 Percentage Change in Net Sales vs. 2008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of
 
 
 
 
Volume
 
Price
 
Currency
 
Subtotal
 
Acquisitions(1)
 
Net Change
 

Seeds and Genomics Segment
 
 
(1
)%
 
 
19
%
 
 
(5
)%
 
 
13
%
 
 
2
%
 
 
15
%
Agricultural Productivity Segment
 
 
(24
)%
 
 
17
%
 
 
(4
)%
 
 
(11
)%
 
 
 
 
 
(11
)%
Total Monsanto Company
 
 
(11
)%
 
 
17
%
 
 
(4
)%
 
 
2
%
 
 
1
%
 
 
3
%
 

 
Despite a down year in 2009, total seeds and genomics EBIT were up 38% over 2008. On the other hand, agricultural productivity (Roundup and other herbicides) were down 20%. These are great signs for two reasons:
1)      Monsanto is undervalued due to major losses in a segment that will be a much smaller proportion of the company in the future, and
2)      The seed segment should continue to grow as Monsanto continues to invest in that area and develop more products
 
Monsanto has recovered very nicely since its low on July 6th. It has recovered a little too quickly though; we look for it to pull back to our current target price of $52. Be patient for the price to drop, and then be quick to buy for the medium-long term
Historically, Monsanto has always been great at developing new products and has some of the best technology in the business, so look for them to recover and prosper long term.


Disclosure: Long MON