3 Stocks to Fight the Drought
Scott is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Monsanto (NYSE: MON), Syngenta (NYSE: SYT), and DuPont (NYSE: DD) are all poised to grow as the corn crop shrinks with the drought. Whether or not you're from the Midwest you will soon feel the impact of the worst drought to hit the area since the 1950s. It's had a drastic effect on corn production throughout the Midwest. If you think this is not a big deal, think again. Corn is an ingredient in 75% of grocery store products -- from cereal to candy bars. Corn is also used to feed our tasty livestock. It is the backbone and fuel for America's $83 billion agriculture business. Without corn our system collapses. As a result, food prices are expected to rise this fall and winter.
How do these companies come into play? The corn shortage has resulted in record high prices per bushel as well as soaring corn futures. Corn prices have risen 50% since June and currently only 24% of corn crops in the 18 key producing states are up to consumer standards. This means that in the coming months there will be a growing number of farms attempting to grow large corn crops to take advantage of backed up demand and the huge per bushel price markup.
The problem is, there is no end in sight for the drought. Even with the huge price increases corn farmers would still be hard pressed to justify growing corn with only 24% of each acre being usable. Enter Monsanto, Syngenta, and DuPont, companies that produce chemicals, fertilizers, regular seed, and genetically modified seed, and plant protection products. Below I will compare these companies and come to a Fool's conclusion on the best of the lot.
Monsanto: Monsanto, who for years back partnered with BASF (NASDAQOTH: BASFY.PK) in the development of drought-resistant corn seeds, is the world leader in sales of regular and genetically modified corn. Industry estimates have them number one with a 36-40% market share in seed sales. This is what they do and will likely benefit the most from increased corn seed sales in the coming months. Their genetically modified seeds are developed to produce more consistent yields during times of drought. It is estimated that these new strains of corn will increase yield 10-20%. Monsanto is in the enviable position of providing motivated corn farmers with a product that will allow them to increase yield in the face of drought conditions. With a heavier planting season planned for corn, the increased demand for regular and drought-resistant seed should mean increased sales for Monsanto.
Currently Monsanto is trading at $86.41 with a PE of 21, a dividend yield of 1.4%, and strong potential for growth with seed sales accounting for 66% of revenue . Monsanto has been hovering around $70-$87 a share price for a couple of years, but with the coming surge of seed sales Monsanto has the potential to reach the same $130-$140 a share range it hit between 2008-2009. It has a buy recommendations from TheStreet, Goldman Sachs and Cramer with a target price of $130.
Syngenta: Syngenta is another agriculturally focused company specializing in chemical treatments for pests, weed control, and drought resistance. They also provide farming and water utilization solutions to farms. Like Monsanto they provide a line of drought and heat resistant corn seed through their Agrisure line. Syngenta is number #3 in corn seed sales behind Monsanto and Dupont with a market share between 20-26%. Syngenta also markets a unique product called Invinsa that is a spray-on treatment designed to protect corn from the harsh drought condition. The company claims that the Invinsa line has increased yield by 5% to 15%. Since this product is new, the impact in company revenue is still unknown. Invinsa is expected to generate an estimated $500 million in sales in the coming years.
Syngenta is currently trading around $68.00 a share with a PE of 19 and a dividend yield of 2.1%. They are the smaller producer in the group, but have provided impressive growth over the last couple of years. They are growing market share domestically and have increased sales by 40% in South America. They have great products with huge potential, but the stock is seemingly expensive, trading just under its 52 week high of $71.48. In the last 5 years Syngenta has had a hard time breaking out above the $72 ceiling. ING group has also lowered its rating on Syngenta from hold to sell.
DuPont: DuPont's business is different from the first two stocks. DuPont was partnered with Syngenta in developing many of their crop chemicals and drought-resistant seed, before they spilt. DuPont essentially provides the same products and services as Monsanto and Syngenta, but agriculture is just a part of their larger business. DuPont is diversified and heavily involved in non-agricultural chemical, coatings, and safety products. With DuPont you will get a more stable company that offers a 15% average return on investment over the last 5 years. The downside versus a company like Monsanto, whose whole business is Agriculture, is that with Dupont you will not see the same share price run up on increased seed and treatment sales. All of Dupont's agricultural sales are done through Pioneer Hi-bred which is responsible for 30% of Dupont's overall revenue. Pioneer Hi-Bred is #2 in seed sales behind Monsanto with an estimated 32-36% market share. About 40% of Pioneer Hi-Bred's revenue comes from seed sales.
DuPont stock is relatively cheap at around $50 a share with a PE of 12 and a nice dividend of 3.45%. This is the most diversified and stable stock of the group. At a PE of 12 it is also the best value in an industry that averages a PE of 19 . The downside is you will probably not capture a ton of growth out of this stock if agricultural sales surge. Dupont has traded between the $45 to $57 dollars range over the last several years. With Dupont you can expect a annual revenue growth of 5% year over year, a nice dividend, and slow but steady share price growth. Seed sales could help Dupont beat top line projections in Q3 and Q4, which could still give you a nice pop in the share price.
Fool's Bottom Line: All three companies will benefit from the corn crisis. With great brand recognition and excellent positioning, my choice would be to go with the number #1 seed company in the world, Monsanto, over Syngenta for terrific growth over the next several quarters. If you have less tolerance for risk and are looking for a mix of stability, mild growth, and an excellent dividend than I would go with DuPont all the way. I don't think you can lose with DuPont and Monsanto.
schuber85 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.