Agro Stock to Watch Out For
Shweta 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) is known for its scientific excellence and its vision for adopting new technologies that can be applied for solving agricultural problems. Its partnership with Alynlam is one such example. I see this company as always committed towards Research & Development and invests about 10% of its sales in R&D with 90% of the investment in seeds and traits business. For instance, last year it invested $1.5 billion in R&D and received $6.1 billion of gross profit, in return, creating significant opportunities for further technological enhancement. The R&D developed traits for its soybean, corn, and other crops to fight with the problem of poor growing conditions, weed, and insects that prevail all through all seasons. It invested in genomic tools which infuse seeds with a genetic material. Monsanto' soybean, corn, and traits business contributed $7.5 billion of sales in 2012.
Talking about its peer, Potash (NYSE: POT): This company is well placed with the increasing demand of fertilizers across the globe. Both India and China the top two consuming countries are willing to increase their purchases of Potash, estimated to be ~57 million tons. In India the inventory has reduced to almost half as compared to the previous level, so there are good chances of increased demand in the upcoming periods. On the other hand, in North America, as the moisture conditions are improving and as harvesting is getting advanced there is a positive outlook for the coming quarter. Further the company is also looking forward to complete its deal with ICL (Israel Chemicals) to increase its stake from 13% to 25%. This deal will increase Potash's capacity expansion to 17.1 million tons as ICL has good production in the Dead Sea of 6Mt which will benefit Potash.
Another Agro company, Agrium’s (NYSE: AGU), retail segment contributes 70% to its total revenue. This segment will now be further benefited with the acquisition of Viterra and Red water plant. With this deal Agrium will have almost 1500 locations all across the globe making it the world's largest crop input products distributor as it will add 232 stores in Canada and 17 stores in Australia. Agrium's presence will be expanded with this acquisition which was earlier limited to only the West Canadian Market with only 65 stores. Agrium is also looking forward to its Redwater fertilizer plant expansion worth $150 million which will expand its nitrogen products output by 25% that is 500 tons per day.
Coming back to Monsanto, I see this as a good long term opportunity because of the two reasons below:
$100 million expansion plan: Monsanto will be making more than ~$100 million of investment in its seed processing plants in Iowa, Indiana, and Nebraska. This expansion plan is expected to begin in August 2013 and the company is looking forward to increase its production of soybean seeds and corn seeds with this expansion. Among the four plants most of the investment will be made in Nebraska and Waco as these areas are 100% irrigated and will be least affected by drought. The expansion money will be paid for dryers and expanded warehouse space at the plants.
Partnership with Alynlam : Monsanto entered into a 10 year partnership with Alynlam in which Monsanto will provide Alynlam's all the exclusive rights for its RNAI- based technology for agricultural use. Alynlam develops compounds by using its RNAI technology and this technology protects the plants from pests, weed and bugs. Monsanto has used this technology in order to improve the amount of oil in soybeans. This technology will bring together the two experts together as Monsanto is known for its scientific excellence and commitment whereas Alynlam is best known for its RNAI technology. With this deal the long term potential looks attractive for Monsanto as this will help to expand its vegetables and fruit business.
Summing it up, I think Monsanto is looking well placed to deliver increasing revenue in the upcoming quarters. Even after facing drought situations, it posted attractive sales figures in 2012. The company is expected to generate cash flow of more than $2 billion in 2013 which will be further invested in dividends worth $800 million, developing new techniques and acquisitions. With forward P/E ratio of 17.99x, I think this stock provides an entry opportunity.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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