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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
-
These Stocks Dipped in 2025. Do They Have Value?If you are looking to add new long-term positions to your portfolio, as you should, this is the time to examine stocks that the market shuns.
-
Striking Gold (or Gas): A Financial Pro Unpacks the Nuances of Energy InvestingInvesting in the energy industry, particularly oil and gas, involves understanding the facts about how projects generate returns through cash flow and long-term asset building, while also being aware of the risks.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
-
How to Invest for Rising Data Integrity RiskAmid a broad assault on venerable institutions, President Trump has targeted agencies responsible for data critical to markets. How should investors respond?
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages — until it wasn't.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
