This Hated Company Is Poised For An 80% Gain


Some stocks are like elite athletes. They may come with some extraneous baggage, but they still warrant a sizeable investment because they perform at such a high level.


#-ad_banner-#Perhaps the best example of this: Monsanto Co. (NYSE: MON), the well-known agricultural biotechnology firm that has sparked a lot of controversy thanks to its aggressive marketing tactics in the agricultural sector.


It all started about 20 years ago when Monsanto introduced the first genetically modified or GMO seed, an herbicide-resistant soybean that enabled farmers to spray weed killers without damaging their soybean crop. Since then, Monsanto has gotten a lot of bad press and been involved in numerous lawsuits related to its genetically modified seeds, herbicides and pesticides.


That’s the baggage. But the fact remains that Monsanto’s products remain extremely popular with farmers. Otherwise, it wouldn’t be generating industry-leading sales and profits or delivering impressive stock returns. Consider the company’s performance over the past few years.


Monsanto Financial Performance 2011-2014
  2011 2012 2013 2014 Growth Rate
Revenue (in billions) $11.8  $13.5  $14.9  $15.9 10.5%
Net income (in billions) $1.6  $2.1 $2.5  $2.7 19.1%
Earnings per share  $2.96  $3.79 $4.60  $5.22 20.8%
Dividends per share $1.12 $1.20 $1.50  $1.72 15.4%
Net margin   13.6% 15.1% 16.7% 17.3% N/A



The company’s expanding product line has helped boost the top line by 50% over the past five years to a recent $15.9 billion in fiscal (August) 2014). Rivals such as Dow Chemical Co. (NYSE: DOW) and (DuPont) E I du Pont de Nemours and Co (NYSE: DD) have seen sales rise by a less robust 5%, and 25%, respectively, in that time. That helps explain why Monsanto’s shares have also handily outperformed the peer group in recent years.


To be sure, Monsanto faces significant near-term headwinds. About 46% of revenues come from outside the United States (mainly Latin America), so the strong dollar is apt to diminish foreign profits this year. Moreover, the firm could see slower sales of two key products, soybeans and corn, in 2015 because record U.S. production last year has created a sizeable supply glut.


Nevertheless, Monsanto remains an excellent long-term growth story capable of mid-teens earnings growth. For one thing, the firm won’t always have to contend with a strong dollar. Indeed, some analysts say the greenback could do an about-face as soon as this year, as investors begin to realize U.S. economic growth is too moderate to warrant current strength.


Plus, Monsanto has a couple of major long-term trends in its favor. One is soaring global food demand, especially in emerging markets like China, Latin America and others, where growing middle classes are driving consumption. In China alone, for example, corn demand is projected to more than triple to about 16 million tons a year by the end of the decade.


Yet at the same time, the amount of land available for farming is progressively shrinking in the face of urban sprawl, soil erosion and other factors. In the United States, 72 million acres of arable farmland were lost during the past several decades, and the tally is now rising by roughly five million acres per year. Similar trends are occurring worldwide.


This means the available farmland must be more productive — and that’s where Monsanto comes in, since its GMO seeds are designed to increase crop yields.


At this point, seeds genetically modified to better resist disease and pests are becoming commonplace in the United States, and an increasing portion of those produced in a half dozen foreign countries. Monsanto already owns most of the major GMO seed brands. It controls 80%-to-90% of the U.S. corn and soybean markets and a similar share of Brazil’s soybean market.


Seeds and genomics, the business segment that makes GMO seeds, generates about 70% of total revenue. Looking ahead, the segment should remain Monsanto’s main growth driver thanks to the trends I’ve described and an innovative product pipeline.


By 2012, for example, the segment had introduced herbicide-resistant corn, cotton, sugar beets and canola oil. It also markets similar seeds engineered with multiple traits such as simultaneous herbicide, insect and disease resistance. In 2013, Monsanto launched the first drought-resistant corn, and it’s beginning to develop a “microbial” portfolio of seeds treated with protective, naturally-occurring bacteria and fungi.


To better diversify its revenue stream, Monsanto purchased weather insurance underwriter Climate Corp. for $1.1 billion in October 2013, though the acquisition wasn’t about getting into insurance. Mainly, management wanted to leverage the acquired company’s expertise in the effects of weather and other factors on agriculture through an online service for farmers.


The service, which is built upon an extensive database incorporating decades worth of agricultural and weather information, is designed to help farmers determine how best to maximize crop yields in specific locations. And it provides another marketing platform for Monsanto products.


Current usage of the free online version alone already represents 50 million acres, or about a quarter, of the corn and soybean markets, according to Monsanto. The service could eventually be a $20-billion-a-year business, management projects.


Overall, management aims to double Monsanto’s earnings during the next five years — a feasible goal given the firm’s dominance and prospects for global growth, particularly in China. Although China has generally been suspicious of GMO crops, Monsanto recently announced plans to begin marketing a modified soybean there in 2016, pending Chinese import approval, according to Bloomberg.


Risks To Consider: Although Monsanto has tried to soften its image, the bad press and lawsuits are likely to continue. The firm has escaped relatively unscathed so far, but there’s no guarantee it won’t eventually incur legal costs large enough to severely hinder company performance.


Action To Take –> Monsanto may have no shortage of detractors, but shareholders certainly aren’t complaining about its stock performance. One measure of investor happiness: the company’s dividend has risen for 15 straight years. Based on management’s long-term guidance, I think this stock can deliver a roughly 80% gain potential through 2019. This year may present multiple buying opportunities, since there’s a good chance that the near-term obstacles I described will cause temporary pullbacks in the price.


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