Stock Watch

Monsanto: A Real Growth Stock

Shares of this innovative seed and herbicide company will blossom for years to come.

By Thomas M. Anderson, Associate Editor, Kiplinger's Personal Finance

May 2, 2008

Everywhere you look people are grumbling -- and in many cases rioting -- about the high price of food. Before you buy a 20-pound bag of rice at Costco, consider hording shares of Monsanto.

This St. Louis, Mo., agricultural giant produces seeds and herbicides. But those seemingly mundane products understate Monsanto's importance in the ongoing worldwide agriculture boom. Simply put, Monsanto helps farmers grow more food than they would otherwise. The company can charge a pretty penny for its assistance thanks to innovative products, such as seed that results in corn that is resistant to pests.

Monsanto (symbol MON) is the top dog in the herbicide and seed sector. DuPont (DD) is second and Syngenta (SYT) a distant third, says Credit Suisse analyst Mark Connelly. He says Monsanto will continue to remain ahead of the competition over the next five years.

Monsanto's domination of the seed and herbicide market is no secret. The stock, which closed at $115.22 on May 2, has gained 95% over the past year. In March 2003, the shares traded for barely more than $7.

Sales and profits of the herbicide Roundup, or glyphosate as chemists call it, has contributed mightily to Monsanto's performance. In the second fiscal quarter, which ended February 29, sales of glyphosate and other herbicides soared 85%, to $982 million, from the same period a year earlier.

Meanwhile, gross profits (sales minus cost of goods sold) surged 133%, to $595 million. The company forecasts a doubling of gross profit from glyphosate sales for the fiscal year that ends August 31. "Retail prices continue to rise while the competitive generic glyphosate supply remains constrained," says UBS analyst Chris Shaw.

Corn and soybeans are the engines of Monsanto's seed business. Corn accounted for 57% of Monsanto's profit in fiscal 2007, while soybeans contributed 19%. All other crop seeds accounted for the rest.

Strong demand for corn in Argentina, Brazil and the U.S. is boosting results. In the second quarter, the company generated gross profit of $1.6 billion, up 37% from the same quarter a year ago. Sales totaled $2.5 billion, up 39%.

Some agricultural analysts expect that farmers will plant less corn this year to take advantage of higher soybean prices. Such a move could hurt Monsanto's sales. But Argus Research analyst Bill Selesky calls those concerns "overblown" and says that "no matter the short-term trends in crop selection, we believe Monsanto stands to benefit from a long-term secular trend of global growth in demand for agricultural products."

About 60% of the $6.3 billion in revenue Monsanto generated in fiscal 2007 came from North America. The company hopes to gain more market share in Argentina, Brazil and India through acquisitions and introduction of new products.

Monsanto has yet to unleash a possibly game-changing innovation. It has partnered with Dow Chemical (DOW) to combine eight genetically engineered traits -- such as herbicide tolerance and insect resistance -- into one corn hybrid. Farmers buy hybrid seed because it produces more corn per acre and allows them to use less herbicide.

Monsanto's current all-in-one corn hybrid, known as triple-stack corn, contains only three genetic traits. Monsanto expects sales of triple-stack corn to climb at least 47%, to $26 million, in fiscal 2008. The company plans to debut the next generation of corn hybrid, called SmartStax, by 2010.

Management is bullish on the future. Chief executive Hugh Grant told investors April 2: "Between now and 2012, we are the only agriculture company that can point to consistent growth, irrespective of commodity price swings, fluctuations in planted acres or the popularity of ethanol."

Monsanto has a solid record of returning its bounty to shareholders. It announced a three-year, $800 million buyback plan on April 16. The plan will start after the company completes a current $429 million repurchase program next year.

Monsanto also recently raised its quarterly dividend 40%, to 17.5 cents, a share. The stock yields 0.6% based on an annual dividend rate of 70 cents per share.

In some ways, Monsanto may fall victim to its own success. Most of Monsanto's earnings now come from corn seed and Roundup herbicide. "While both of these are great businesses, it doesn't do much for portfolio balancing," says Credit Suisse analyst Connelly.

He says he worries that the stock may be overpriced. The stock trades at 34 times the $3.34 per share that analysts expect the company to earn for the current fiscal year and 29 times estimated earnings of $4 for fiscal 2009. He advises investors to "keep what you own and buy on any meaningful dip. Little has changed in this incredibly powerful story."

If Monsanto can achieve the annual long-term earnings growth that analysts forecast, its stock may be worth the price now. According to a survey of analysts by Thomson Financial, earnings are expected to grow 37% annually over the next three to five years. Selesky rates the stock a "buy" and says the shares are worth $144.

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