It's Not Too Late to Get Hold of This Stock
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The fertilizer sector seems to be the happiest of all this week, and another stock hitting a 52-week high is no joke. After a trip to the top, Monsanto’s (NYSE: MON) stock is flirting with a P/E of 22.2, which is much higher than that of peers.
Yet, I continue to remain bullish on this one, as recent performance has been stupendous, and growth drivers are too good to ignore.
No complaints
Monsanto has churned out some of the best numbers in the past few quarters, with top and bottom lines rising steadily year-over-year. Take a look at the how the graph for some of the important operational performance metrics is rising-
MON Net Income TTM data by YCharts
And here’s a quick snapshot of how the company consistently crushed analysts estimates by wide margins in each of the last four quarters.
| Quarter Ending | Actual EPS reported ($) | Analysts EPS estimate ($) | Surprise % |
| May-12 | 1.63 | 1.6 | 1.9% |
| Feb-12 | 2.28 | 2.12 | 7.5% |
| Nov-11 | 0.23 | 0.16 | 43.8% |
| Aug-11 | -0.22 | -0.27 | 18.5% |
Source: Yahoo! Finance
Small wonder then how the market showered its love on Monsanto. Riding on the strength of solid earnings, its stock has gained 38% in the past one year, emerging as one of the top industry performers in terms of total returns.
The question now is: what’s going to drive Monsanto further? Plenty of things, including the drought.
Drought, a boon?
Yes, you heard it right. The drought that ravaged farms across the U.S. could actually turn the spotlight on Monsanto’s products. With current crop yields doubtful, the farming community is largely pinning hopes on a good next spring, backed further by high crop prices. This would be good for almost any company that is into the agriculture sector, but Monsanto has an extra edge.
It is redefining itself as a ‘yield company’, which fits in perfectly well with current situations. When no one can predict what Mother Nature’s mood will be like, farmers will push hard to maximise crop productivity and yields from whatever acreage available. Monsanto’s genetically modified seeds and traits have proved to be highly tolerant to severe weather conditions – something farmers are unlikely to ignore. After this year’s drought, farmers might just feel a bigger need to replenish stocks with such seeds.
Hopes beyond home
Till the next U.S. planting season arrives, Latin America should drive Monsanto’s business. Farmers in key markets like Brazil and Argentina are gearing up for record crops this year as the nation kicks off its peak planting season, invoking optimism among all – from fertilizer titans to seed majors. CF Industries (NYSE: CF) expects the Latin American market to boost sales of phosphates in the forthcoming months, while Mosaic (NYSE: MOS) predicts record shipments to Brazil this year backed by strong demand for both potash and phosphates. Monsanto’s arch rival DuPont (NYSE: DD) foresees a strong Latin American season for both seeds and crop protection products.
Given that Brazil is its most important market after the U.S. and Europe, it’s not tough to see why Monsanto won’t be one of the biggest beneficiaries. And smart that it is, the company is launching critical products at what seems to be the perfect time.
Armed up
Monsanto will introduce its triple stack corn in Argentina next year, which should add 20% to 30% to gross profits per acre. For Brazil, Monsanto will aggressively upgrade to double-stack corn trait which could mean around 70% additional gross profits per acre. But a bigger reason for excitement is the trials currently underway for its insect-resistant soybean Intacta RR2 PRO in Brazil. With trial yields reported to be 15% higher, these seeds are likely to go on sale soon, and Monsanto believes this product will be one of its biggest growth drivers in the nation in the years to come. Back in the U.S., its drought-tolerant corn is ready for on-farm testing after being deregulated by the USDA, and a commercial launch is expected in 2013 or 2014.
But it’s not an empty field to ride on, as peers arm themselves to fight. Both DuPont and Dow Chemical offer genetically modified seeds, and they got a good opportunity to push their products when Monsanto got stuck in the bug muddle. DuPont's pest-resistant corn, developed in collaboration with Dow, didn’t face any issue. DuPont has also lined up several new products targeting Brazil, including pest-resistant soybean varieties that should be out by 2014.Syngenta (NYSE: SYT) has got bigger aims after its innovative four-stack pest-resistant corn was approved in Argentina. It is, in fact, looking beyond corn varieties for the region.
Yet, Monsanto needn’t worry, for it doesn’t dominate the seed industry for nothing. Monsanto’s excellent innovation and research and development strategies have taken it this far, and should continue to do so. The fact that Monsanto’s competitors use its licensed gene traits and chemicals for their products acts as icing on the cake. Monsanto’s dominance in the industry was underpinned last month when it won a $1 billion suit over DuPont after the latter was found guilty of unlawfully mixing Monsanto’s Roundup Ready trait with its own. Roundup Ready seeds can resist glyphosate-based herbicides. And the bug fiasco seems to be done, at least for now.
The Foolish bottom line
Global demand for food is growing, and climate is visibly playing dirtier games as the world ages. If Monsanto’s seeds can give juicy yields on boiling and dry grounds, there’s no reason why it won’t stay at the top of the game. If you can withstand short term volatility, this is one stock that should have a no-questions spot in your portfolio for long. Solid industry hold, great returns on investment, good financial strength, and a business that won’t run out of fashion as long as we need food – what else do you need? Interested in tracking this stock as it continues on its path? Add Monsanto to your Watchlist now.
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Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services recommend Syngenta. 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.If you have questions about this post or the Fool’s blog network, click here for information.
