These Stocks Are Feeding Growth
tarun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Global population is expected to reach the 9 billion mark in next forty years, and with limited cultivable land the pressure to increase yield is on the agriculture companies. Agriculture companies therefore have the opportunity to lure investors if they have well-thought out strategies in place. Let’s take a look into the stocks which are going to be in the win-win situation.
The Shinning Mo(o)nsanto
Monsanto’s (NYSE: MON) first fiscal quarter results were spectacular. Revenue shot up 21% to $2.94 billion from $2.44 billion in the same period last year. Strong sales in Latin America have improved its top line. The profits have nearly tripled from $126 million or 23 cents a share to $339 million or 63 cents a share in its most recent quarter. That profit figure has beaten the analyst estimates of 36 cents handsomely.
The company’s corn and seed traits business surged 27.3% on the year, while soybean seed traits and other seed traits revenue have been lower compared to the same period last year. Summer drought in the U.S. created a shortfall in supplies of corn and soybean which inflated their prices. The rise in prices acted as a catalyst which led to increased production of corn and soybean helping Monsanto’s revenue to rise.
The company’s dividend yield currently is 1.6%, which is about 32% payout of its current earnings. Monsanto’s earnings are growing at an exceptional pace but they might be hard to replicate in the long-run, so paying a stable dividend in long-run and financing their R&D requirements with surplus cash seems to be a wiser move (which the company is following currently). The company consistently spends on R&D and currently has 18 projects in the pipeline, like dicamba-tolerant corn and cotton, and a variety of new traits whose success can open wider avenues for the company.
A Dig into Competitors
DuPont (NYSE: DD) is one of the biggest competitors of Monsanto. It has a diversified business structure which includes chemicals, electronic materials, and plastics along with agricultural productivity solutions. The diversification allows better leverage for DuPont during volatile business period. The boom in agriculture industry has benefitted DuPont as farmers are willing to spend extra in order to improve their yields. Diversification into agriculture also provides stability to the company’s business model as food is a necessity and rising population drives farmers to DuPont and Monsanto to help them increase yield.
From an investor’s return point of view, DuPont has a dividend yield of 3.70% and has plans of repurchasing stock worth $1 billion as initiated in the end of 2011. These returns provide an additional cushion to investors apart from stock price appreciation. The company has a very high ROE of 28% and a trailing P/E ratio of 15.50, which is in line with the industry average. The stock might not provide a huge upside in stock prices as its trading fairly but still is a good bet from a conservative investor’s point of view.
Corn being the buzz at the moment, a name that props my mind is Monsanto’s rival Syngenta (NYSE: SYT). The company has launched 70 corn hybrids that improve yield and/or quality of the stock thereby making its presence felt in the agriculture industry. Syngenta’s four-stack corn has already been approved in Argentina which takes it a step ahead of its competitors in the market. Syngenta's business is mainly concentrated around seeds and pesticides, which help it to drive benefits of high margins of agricultural business. The company is a good investment, keeping in mind the corn syndrome going on at the moment.
Monsanto is the leader in corn and soybean. With prices of corn expected to be on the higher side the company should be more than happy at the moment. If the company comes out with a breakthrough in wheat, oilseeds, and sugarcane in its emerging projects then revenue should improve further. The prospects of the company look bright to me but I feel Monsanto is expensively priced at 22 times its earnings. The current prices though do not provide a good entry point but Monsanto’s prospects have enough reasons for investors to hold their existing investments.
tarunbachhawat has no position in any stocks mentioned. 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!