A MONster of an Opportunity

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While the market sits near all-time highs, looking for a fresh investment opportunity is not an easy task. It's rarely smart to buy a stock at its 52-week high, so instead, we must search for the names who have pulled back. The global powerhouse Monsanto (NYSE: MON) has declined 11% over the last three months and has the appearance of an incredible value play. Let's dig deeper and see whether this company is worth buying right now.

The company

Monsanto is an agricultural company focused on providing farmers with the highest-quality seeds, traits and technologies, and weed control products. Its seeds include corn, soybean, cotton, and wheat, while its traits and technologies help farmers become more profitable per acre. Finally, when it comes to weed control, Monsanto's RoundUp brand is one of the most popular in the world. A company is only as strong as the products and services it offers, and Monsanto does not disappoint. 

Third quarter 2013

On June 26, Monsanto reported mixed results in its third-quarter earnings:

  • Earnings per share of $1.66 vs. expectations of $1.59
  • Net sales of $4.25 billion vs. expectations of $4.41 billion

Monsanto's CEO said that the company's revenue lagged because it did not pass on rising seed production costs to its customers. On the bright side, this situation is not expected to continue. The highlight of the quarter was in the weedkiller unit, primarily from the brand RoundUp. This unit saw a 31% increase in gross profit because of higher prices. With this growth expected to continue and seed prices leveling out, Monsanto's management remains bullish for the rest of 2013 and in the years to come. 

Earnings outlook

In May, Monsanto raised its full-year earnings forecast for the third time this year, and it reaffirmed this outlook in the third-quarter report. The expectations show growth of more than 20% in fiscal 2013, with mid-teens growth in 2014. Analysts agree, and they've compiled these estimates:

<img alt="" src="http://g.foolcdn.com/editorial/images/65799/chartgo_large.png" />

  • 2013: 23.8% growth
  • 2014: 16.2% growth
  • 2015: 13.5% growth
What we can expect

According to YCharts, Monsanto has an average price-to-earnings ratio of 24.51 over the last five years, and a minimum ratio of 15.97. This means that if Monsanto traded at its average P/E in 2015, we could see the stock reach $148, up more than 52% from its current price. Even if it continued to trade at its current multiple of 20.9, the stock could still reach $126. This kind of return is enough to tempt any value investor, even before you mention the additional income from its 1.8% dividend.

Dividend and share repurchase

Monsanto's chief financial officer, Pierre Courduroux, stated that the company intends to use its cash to benefit shareholders through dividends, repurchases, and strategic investments. 

On Aug. 6, the company followed through on this strategy by raising its quarterly dividend by 14.7% to $0.43 per share. This increase came exactly two months after its board of directors approved a $2 billion share repurchase program. 

Competitor comparison

In the last three months, Monsanto has fallen 10% -- but one of its direct competitors, Syngenta (NYSE: SYT), has fallen just 3%.

Monsanto and Syngenta are two of the only companies with seeds, traits and technologies, and crop protection as their primary focus. Others, such as DuPont and Dow Chemical, have these segments as a smaller part of their overall operations. When considering an investment in the seed industry, I prefer a pure play.

With all of that said, we can determine a pullback in the seed industry by looking at Monsanto and Syngenta as the main players. Monsanto has faced a steeper decline, but this gives it the opportunity for a much higher return going forward. However, both Monsanto and Syngenta are cheap when you consider their growth potential. Here's a breakdown of the key financial statistics:

<table> <thead> <tr><th> <p><span>Company</span></p> </th><th> <p><strong>Monsanto</strong></p> </th><th> <p><strong>Syngenta</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Market Cap</p> </td> <td> <p>$51.7 Billion</p> </td> <td> <p>$36.5 Billion</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>20.9</p> </td> <td> <p>20.7</p> </td> </tr> <tr> <td> <p>Forward P/E</p> </td> <td> <p>18.2</p> </td> <td> <p>15.5</p> </td> </tr> <tr> <td> <p>Dividend Yield</p> </td> <td> <p>1.8%</p> </td> <td> <p>2.1%</p> </td> </tr> <tr> <td> <p>YTD Performance</p> </td> <td> <p>+0.99%</p> </td> <td> <p>(2.01%)</p> </td> </tr> <tr> <td> <p>% Below 52-week high</p> </td> <td> <p>11.3%</p> </td> <td> <p>9.5%</p> </td> </tr> </tbody> </table>

Source: TD Ameritrade.

After reviewing the ratios, Syngenta may look like the better value play -- but this is not the case. For the first half of 2013, Syngenta reported free cash flow of -$359 million. In comparison, Monsanto reported a free cash flow of $399 million for the nine months ended May 31, up 28.3% compared to 2012.

Negative free cash flow could endanger Syngenta's dividend, slow its product development, and keep its debt high and potentially growing. Its management team predicts substantial free cash flow in the second half of the year, thanks to accelerated sales growth, expense reduction, and a decrease in restructuring costs; however, potential investors may want to wait a quarter or two to see how that plan plays out. For Syngenta's sake, investors had better hope management truly can turn it around.  

The Foolish bottom line

Monsanto is in a terrific position to outperform the overall market for the remainder of 2013. Its recent selloff is nothing more than an opportunity to initiate a position in the world's largest seed company. I currently own a long position in the stock, and I will continue adding to it on weakness. 

Joseph Solitro is long Monsanto. 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!

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