This Sector Is Making Profits
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the agriculture sector fights against the misconception of being an unprofitable sector with no/low margins, there are a number of large companies which are deriving profits in this sector. One of them is Monsanto Company (NYSE: MON), whose share price has galloped from a low of $69 to a high of $104 in the last one year.
Providing some background, Monsanto provides agricultural products to farmers. Its main competitive advantage is its seed technology, which it genetically modifies and is proven to be drought and pest resistant. Given its USP, the company has been able to extend its reach to most of US. Putting things in perspective, since the seed was introduced in 1996, the company has been able to reach approximately 90% of US soybean farms.
However it has a stringent policy, wherein farmers can choose to buy new seeds every year, but are restricted from collecting second-generation seeds as the company claims that the technology has been patented. While some criticize the company as they say that nature cannot be patented but on the other hand some compare it to movie or music piracy, supporting the move.
In relation with the above, Monsanto is fighting a case in the Supreme Court. It claims that an Indiana farmer replanted the company’s seeds after purchasing them second hand. And the court also seems to side with the company, saying that the farmer has violated the company’s patent.
Further, another suit with Monsanto deals with its archrival DuPont (NYSE: DD). Monsanto filed a patent infringement case against DuPont, over seeds for growing herbicide-tolerant soybeans. In one of the biggest US jury verdicts, DuPont will be required to make $1.75 billion royalty payments over the next 10 years and allow Monsanto to access its disease-resistance and corn-defoliation traits. The upcoming Monsanto 10-Q should hopefully provide details with what the company plans to do with the cash.
The company recently raised its full-year guidance due to better-than expected second-quarter earnings. It raised its guidance from its January goal of EPS $4.30 - $4.40 to $4.40 - $4.50. Further, its Chairman and Chief Executive Hugh Grant, also mentioned that if it is able to achieve this forecast, it will be the third consecutive year of greater than 20% growth in its EPS.
Its 2Q13 revenue increased 15% and net earnings increased 22% based on continued growth of its global corn business and positive performance of its agricultural productivity segment.
The company is strongly focused on growth and last year it set a record with 18 projects in the development. It has already started distributing its new highly resistant corn hybrids and sees a huge opportunity in Latin America where it plans to launch its double and triple-stack corn.
Its key competitors include DuPont and Syngenta (NYSE: SYT).
For 4Q, DuPont reported weak results with earning declining 70% due to flat sales and de-leverage in its costs. Although its agricultural division is the fastest growing division adding $311 million in sales in FY12 vs. last year, it still experienced headwinds from lower volume and currency fluctuations. The company plans to cut down its costs from about $300 million - $450 million to about $300 million in 2013. It provided guidance in line with analyst expectations with EPS of 3.85 to $4.05 on revenue of $36 billion.
Syngenta provided strong FY12 results with sales increasing 7% and net income increasing 17% over last year. It experienced strong growth rates of 8% and 11% in developed and emerging regions, respectively. However, it is important to note that the company has been accused for human rights violation in South America and its herbicides and pesticides have been subject matter for various safety investigations.
Out of the three, DuPont is the largest in terms of revenue and has the highest dividend yield but it falls short on its margins, which look dismal when compared to its peers. Monsanto on the other hand, has posted strong revenue growth and margins and also has the lowest debt levels among the three.
Out of the three, Monsanto does fall behind on its dividend yield, but its share prices have rallied by 31% in the last one year as compared to Syngenta’s 20% increase and DuPont’s 7% decline.
Monsanto is poised for growth due to its upcoming projects and given the recent droughts that have affected America. In comparison to its peers, it seems to be the most expensive with a PE of 24. But this seems warranted given the company's future growth plans and expected 18% growth in EPS. Given its strong revenue as well as future cash flows from its recent ruling with DuPont, the company is a definite “Buy.”
Shas Dey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!