On the market for Monsanto
May 11, 2012 7:50PM
Updated: June 14, 2012 8:06AM
D ear Mr. Berko: Early last year, you recommended Monsanto Chemical. I bought 50 shares in my IRA and 50 shares in my wife’s IRA at $66. We are a little bit ahead, but I have been disappointed in its performance. During the last 12 months, we’ve had a strong stock market and Monsanto hasn’t done as well as the market. In fact, the stock has come down from its recent high price of $84 and we are concerned it may continue to fall in price. Do you think we should sell Monsanto and put the money in another issue that looks to have more upside potential? It seems to be such a boring company.
San Antonio, Texas
: When I recommended Monsanto, you “pleaded” for a long-term, quality growth stock that you could own for 10 years without worry. Now you have worry ants in your pants! Are you talking to your hot shot broker again who wants to sell you more of his flashy stocks? Have you forgotten his last few recommendations so soon?
Monsanto (MON — $73), an $11.5 billion revenue company, divides its business into two categories: (1) Seeds/genomics, biologically oriented to help growers produce higher yielding crops, generating 70 percent of revenues and (2) Agricultural activity focusing on feed products for livestock and chemicals for crop protection, producing 30 percent of revenues.
MON’s genetically modified products are so accepted by growers that nearly 85 percent of the corn and soybeans grown in the U.S. contain a licensed MON technology. But a couple of years ago, MON’s impressive technology lead gave management an excessive case of executive hubris, encouraging MON to overprice its seeds and over-produce its crop chemicals and pesticides. As a result, customers were driven into the waiting arms of DuPont, Bayer and Syngent, revenues fell and profitability declined. Management corrected its strategy and did their mea culpas, but not before a year of subpar performance was recorded, forcing the stock drop in price.
There are always short-term glitches in the performance of every global company. In the last decade, though, MON’s revenues more than doubled as earnings grew nearly sevenfold. And while commodity prices have cooled in the last year, agricultural markets will be red hot again as the growing wealth of industrialized nations unlock a huge pent-up demand.
MON’s impressive R&D pipeline, innovations in agricultural biotechnology, new strategies focusing on yield improvement and an impressive product mix position it to aggressively grow its business in the world’s emerging markets. Yes, MON looks as exciting as a Japanese Kabuki dance. Its products have zero sex appeal, don’t lend themselves to splashy TV commercials, nor are they understood by the vast majority of Americans whose dinner tables are richly garnished thanks to the scientists at Monsanto.
MON is an extremely impressive company that should provide equally impressive revenue and earnings growth in the coming decade, plus attractive net profit margins of 15 percent or better. Tens of millions of its shares are owned by some of the world’s wisest investors. MON has a superb balanced sheet and debt is a low 14 percent of capitalization. Revenues for this year are expected to come at $12.5 billion and exceed $16 billion by 2016, producing share earnings over $8.00 and a potential stock price of $160/$180 a share. The niggardly dividend of $1.20 is not likely to increase much because management prefers to pay down debt and reinvest a substantial portion of its earnings.
Continue to hold those shares, and if you have additional investible funds, purchase 50 more for each IRA. And in the next three years or so, I think MON will split 2 for 1, so then you’ll have 200 shares and possibly substantial gain in value.
Address your financial questions to
Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.