Betting the Farm on Monsanto

I've had some harsh things to say about Monsanto (NYSE: MON  ) in the past, but there's no arguing with the company's latest results. Sales in almost every segment increased markedly, while operating margins opened wide enough to let profits through, as opposed to last year's essentially flat quarter. Monsanto also reaffirmed its full-year earnings guidance, leaning toward the high end of the range with growth in the mid-teens.

I still have certain concerns about Monsanto, but I believe strong growth is still ahead for the company, and I don't believe the market is fully recognizing its value. Read on to see why I'm making a CAPScall on this company.

The world is overrun with new shades of green
One problem I've highlighted before is that some of Monsanto's most important products appear to be losing effectiveness, such as the weed-killer Roundup. Roundup is important in itself, but many of the company's best-selling seeds are popular because they are "Roundup-ready," enabling farmers to spray copious amounts of weed-killer without worrying about killing their crops at the same time. Unfortunately, nature will have its revenge, and the widespread use of Roundup has led to the emergence of Roundup-tolerant "superweeds."

Similarly, the EPA recently announced that corn rootworms in Iowa and Illinois may have developed a resistance to a strain of corn Monsanto developed. The corn has a special gene designed to make it poisonous to these insects, but some researchers have been finding many acres destroyed by the rootworms anyway.

The increasing ineffectiveness of Monsanto's products creates an opening for competitors. An insect-resistant corn developed by DuPont (NYSE: DD  ) and Dow Chemical (NYSE: DOW  ) so far hasn't shown any sign of becoming ineffective. Farmers may begin to switch to that product if Monsanto's continues to have problems, and other competitors are sure to try to exploit this weakness as well.

And I know you're waiting for the ironic ending
These problems would play wonderfully into a bearish thesis, but strangely the data just doesn't agree with the story. Monsanto is, in fact, growing its market share, and quite rapidly, too. From 2006 to 2009, the top four seed companies grew from 49% of the global seed market to 58%. But take a look at where the growth actually came from.

Company

2006 Market Share

2009 Market Share

Change (in percentage points)

Monsanto 21% 27% 6%
DuPont 14% 17% 3%
Syngenta 9% 9% 0%
Groupe Limagrain 5% 5% 0%

Source: ETC Group

Monsanto controls over a quarter of the global proprietary seed market and the gap between it and its nearest competitors is widening.

Part of the reason Monsanto's market share is growing is because it gets almost half its sales internationally, allowing it to tap into less-saturated markets. While the superweed problem exists all over the world, it isn't as prevalent in some areas as it is in the United States. Roundup isn't as commonly used yet in certain emerging markets, and Roundup Ready seeds have only recently been approved in even some developed markets. Superweeds will likely become more rampant in these new markets, but not yet, buying Monsanto time to solve the problem.

Meanwhile, even if Monsanto's competitors do gain an edge, many of their own products incorporate chemicals and gene traits that are licensed from Monsanto.

Drop your seeds there, let them go
Monsanto's products don't focus exclusively on herbicides and pesticides. The company is trying to redefine itself as a "yield company" by moving to a more diversified mix of plant nutrition products and focusing its research on developing seeds that use fertilizer more efficiently, and tolerate periods of intense heat and drought. These qualities will be important to help double crop output by 2050, which the UN believes will be necessary to feed a growing population.

Going forward, the massive moat around the company puts it in a prime position to benefit from a very long-term growth trend, making this one stock to buy and hold for a long time. I'll be adding it to my CAPS profile, and you can follow along by adding it to your own or to My Watchlist.

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Fool contributor Jacob Roche holds no position in any of the stocks mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. Motley Fool newsletter services have recommended creating a synthetic long position in Monsanto. 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.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2012, at 3:42 PM, ajkmsteph wrote:

    If you read the detail behind the isnect and weed issues you will see that they are either small or being rectified. For insect traits - Monsanto already has a solution with Smart stax and its not even clear there is a real problem even if the less than 1% of acres are really having a problem. They also have 3rd and 4th generation insects traits in the works - can't say that about their competitors. For weed resistance - this is becomes a challenge but there are ready solutions already being used -- you have to understand that Monsanto's competitors thrive on selling higher priced herbicides and also want people to think there is a problem - but this is not a really problem when you spend $1 billion a year on R&D

  • Report this Comment On January 11, 2012, at 3:51 PM, TMFTheDoctor wrote:

    I agree. The rootworm issue is still being investigated and looks pretty isolated. They've caught it early enough that even if it starts to spread they will probably have a solution soon. Superweeds are a bigger problem and have been for several years now, but even competing solutions tend to incorporate Monsanto products so the company should benefit regardless.

  • Report this Comment On January 11, 2012, at 4:28 PM, stan8331 wrote:

    There are very few companies I refuse to invest in on moral grounds, but Monsanto is at the top of that list. They employ a basic mob protection racket - it's a dangerous world out there and if you don't buy our genetically engineered seeds, who knows when we might discover a violation and have no choice but to sue you for everything you own.

    GM seed contamination is so prevalent it's showing up even in certified organic crops. Monsanto has also embarked on a coordinated campaign to make it illegal for milk producers to label their products as not containing recombinant Bovine Growth Hormone. rBGH has been implicated in some very nasty diseases, but of course Monsanto assures inattentive US consumers there's nothing to worry about. Since 1994, every industrialized country in the world, except for the US, has banned the drug.

    In a world that's beginning to pay closer attention to environmental and health concerns, even those who don't give a rip about ethical issues have good reason to cast a very cautious eye toward Monsanto. I understand the argument that Monsanto is only taking full advantage of existing law. Usually I agree with that line of reasoning, but I believe there are some responsibilities to humanity that go beyond the legal largesse a company can succeed in purchasing for itself. For me, Monsanto has crossed that line by a wide margin.

    http://www.vanityfair.com/politics/features/2008/05/monsanto...

  • Report this Comment On January 11, 2012, at 6:46 PM, Rat11 wrote:

    fine article as far as it goes. Just one little tip if you are going to analyze this business. While you correctly state that Monsanto is in the process of correcting the still minor issues with insect and weed resistance, you seem somewhat mystified as to why their market share would be increasing. The answer is that Monsanto has been very assiduous about improving their underlying hybrids through breeding. The potential yield and other important base hybrid traits are still the most important criteria that farmers evaluate and by all accounts Monsanto has done a very good job in this area.

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