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Monsato is going Organic – and they should

Jul 13,2014  Op-Ed  Comment: 0

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New York City, New York- (StockNewsDesk) – 07/13/2014 —  It is this sense of security, which has allowed Monsanto to grow and continue to become the world’s biggest producer of genetically modified seeds. However, with the latest developments regarding Monsanto’s business, the company is going organic, but not the way you would think it. Monsanto is known to acquire businesses, which are either competitors or venture startups  to be a good addition to the company’s diverse line of products. Most recently, the company spent almost $1 billion to buy Climate Corp, a startup which specialized in weather analytics and risk management. Now, however, Monsanto called for a move to take over its Swiss rival Syngenta; a move which would have made Monsanto the biggest agricultural technology company in the world, cuts its tax-inversion deal with the government. This would be the case as Monsanto would be free to relocate its headquarters to Switzerland. Most importantly, the savings could have been pumped back to the investors in the form of higher earnings.

It could have, would have, and should have. Now that the deal is in shambles, does this mean that Monsanto should no longer hold your interest? I’m afraid not, there is still too much that is too good about Monsanto to let it pass.

Finances

The first reason why Monsanto cannot be discarded is because of its large market share in not only the US, but also worldwide. Recently, the GMO maestro was banned from Europe and China, but its global share continues to increase as it enters new markets in the shape of South America and India. This is represented by the consistent uptick in revenue on a yearly basis. Besides 2010 when the US was at the mercy of unfavorable weather conditions, Monsanto has consistently shown positive grown in revenues.

Year-on-Year 2004-08 2005-08 2006-08 2007-08 2008-08 2009-08 2010-08 2011-08 2012-08 2013-08
Revenue 61.78 15.34 16.68 16.6 32.72 3.16 -10.42 12.57 14.23 10.05
Operating Income 31.85 19.48 58.63 20.48 91.89 14.04 -48.21 55.69 25.82 13.41
Net Income -4.49 170.2 44.12 103.83 4.2 -47.42 44.91 27.26 21.37
EPS -5.05 165.96 43.2 102.23 4.97 -47.11 47.26 28.04

Even more importantly, net income and EPS are closely related as the former allows growth in earnings transferred to shareholders. Monsanto has an interesting policy to keep its margins up, which is inclusive of patents and technology licenses. When a patent expires, the company issues newer seed varieties and replaces previous products on the shelf; similarly, the scale of Monsanto’s business is such that it utilizes the sale of technology licenses and when a rival eats into Monsanto’s market share, the company inadvertently stands to benefit from its position in the licenses sold to its competitors. Hence, one way or another, Monsanto’s EPS has been largely in double figures in the recent history.

Indicator

Monsanto

DuPont

Market Cap $63.4 billion $59.6 billion
Price/Earnings TTM 24.4 20.8
PEG Ratio 1.3 1.6
Net Income Growth (3 Yr Avg.) 25.6 17.0
Net Margin% TTM 17.2 11.0
Dividend Yield, % 1.42% 2.77%
Return on Equity 18.6 20.9
Current Price $120.90 $64.89

Instead of investing a staggering amount of money into acquiring Syngenta, Monsanto will buy back $10 billion worth of shares over the next two years, and, more to the point, declared that it expects to at least double its profits by 2019, thanks almost entirely to its seeds and genomics businesses. The importance of this development will be reflected in a sky-rocketing share price and continued intrinsic growth for the future. Furthermore, its current financial has already shown a healthy valuation and stable margins. By the P/E metric, Monsanto looks overvalued, but with the incorporation of growth in PEG ratio, Monsanto’s growth is expected to outpace its nearest rival Du Pont.

Verdict

The anti-GMO sentiment is massive in the US, but it is not affecting Monsanto’s health and profits. In 2013, the company’s sales clocked in at $14.9 billion. These massive numbers can be attributed to the company’s growing seeds and genomics business, which brought in $10.3 billion. There was a time when Monsanto was a chemical technology company, but now it solely has its sights on the agricultural technology business. US Agriculture in the latest GDP figures,clocks up at $204.24 billion; about 80% of U.S. corn and more than 90% of U.S. soybeans are grown with seeds containing Monsanto’s patented seed traits. This puts into perspective how far Monsanto has come in its quest to realign itself as the undisputed seed producer. This also clearly shows the low-risk strategy Monsanto has adopted for stability and growth in the future.

Monsanto is ano-brainer;its global and national risk is hedged due to its sheer technological economy of scale. On the stock market too, Monsanto’s dominance is promising.

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