Will Trade Demand Boost Stocks?
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A recent surge in demand for cotton exports couldn't have come at a better time for farmers and seed developers as the agriculture sector places a year that was tainted by severe drought in the rear-view mirror. Nonetheless, whether a spike in recent cotton demand is indicative of future trends remains unclear.
U.S. cotton exports soared some 190% in the most recent 4-week period to more than 333,000 one-quarter ton bales, according to The Wall Street Journal. Even though demand from China, which has the largest appetite for cotton in the world, has abated some, trade activity to other Asian countries has offset that weakness. Plus, according to the WSJ article, China will ultimately get its hands on the cotton once the commodity is spun into yarn anyway.
Looking ahead, however, and according to a Fiscal Year 2013 outlook by the U.S Department of Agriculture, weakened cotton demand from China is expected to hurt domestic exports of the commodity to the tune of $200 million next year. So where does all of this data leave agricultural stocks, like Monsanto (NYSE: MON), a company that uses a combination of genetics and biotechnology to develop seeds?
Cotton is not the main revenue driver at Monsanto, but it is named among the top 4 market segments. Agricultural company Monsanto has already seen its share price advance more than 25% year-to-date. The company is looking to growth in its top-performing segments -- mainly corn and soybeans -- to pave the way for future gains.
In a recent investor conference hosted by Citigroup, Monsanto chief technology officer, Dr. Robb Fraley, was unable to provide updated cotton harvesting data except to say that the yield looked "good." In further resources provided by the Monsanto, the company noted that it was experiencing strong performance in its DeltaPine cotton germplasm seed segment. Fraley intends to update investors on cotton harvests in January on the company's 1Q earnings conference call, when more information is available.
The bulk of Monsanto's research and development spending, however, is in corn, which is similarly where the highest profits are generated. R&D spending on cotton ranks below corn, oilseeds and vegetables more broadly. In the 4Q, cotton sales declined versus the year ago period amid what the company characterizes as "acre shifts to other crops," in its earnings report. For instance, Monsanto is developing corn seeds that are designed to better withstand drought conditions.
Monsanto's cotton revenues fell to $29 million in the fiscal 4Q compared with $181 in the year-ago-period. Sales also dropped for the fiscal full year to $779 million from $847 million. Overall, the company grew its full fiscal year 2012 EPS by 25% and generated a record $2 billion in free cash flow. Next year, the company expects to generate cash flow of between $1.7-$1.8 billion. In addition to keeping a keen eye on acquisition opportunities, the company will remain focused on share buybacks and dividend distributions.
Also on the acquisition trail is Syngenta (NYSE: SYT), which recently acquired sunflower seed company Sunfield Seeds. The target company was one of Syngenta's suppliers and combined the companies are attempting to increase their share of the $1 billion sunflower-seed market, where much of demand originates from emerging economies. Since announcing the acquisition, shares of Syngenta climbed 6%.
For its part, much of Monsanto's focus is on corn and over a longer term horizon soybeans. The company expects corn and soybean opportunities in 2013 and beyond to abound -- particularly in Latin America, where Monsanto is experiencing notable trade growth. USDA forecasts underscore that momentum, as the agency expects that oilseed and product exports will rise in fiscal 2013 amid an anticipated 20% increase in soybean exports.
Next year, Monsanto expects to spend approximately $1.53 billion in R&D. Based on the company's EPS projections for fiscal 2013, the stock is trading at a price-to-earnings ratio of about 21.
An overall improvement in agricultural exports also stands to benefit companies on the peripheral, such as equipment maker AGCO (NYSE: AGCO). This Duluth, Georgia-based company is determined to bring the farming industry into the technology mainstream. AGCO recently launched a mobile application for agricultural professionals to keep up with inventories and maintenance of farming equipment, including a GPS component that helps farmers locate the whereabouts of their machines.
As companies like Monsanto and Syngenta continue to invest in their businesses, the equipment makers are in a position to benefit. And with the possibility of more extreme weather conditions notwithstanding, the focus on international markets, export demand and the use of biotechnology for seeds all appear to be the drivers of future projected earnings growth.
GerelynT has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Monsanto Company. 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!