Here's Why Monsanto Should Keep Growing Higher

Shares of Monsanto (NYSE: MON  ) hit a 52-week high today. Let's take a look at how the company got there to find out whether there are still clear skies ahead.

How it got here
There aren't many big news movers to watch for a long-standing stable stock that rides the ebb and flow of planting season. Monsanto had three of 'em this year: earnings (in the third quarter), earnings (in the second quarter), and earnings (in the first quarter). Over the past 52 weeks, Monsanto has pulled away from its farm-supply peers, riding the strength of strong earnings to a 20% gain:

MON Total Return Price Chart

MON Total Return Price data by YCharts

My fellow Fool Jacob Roche offers one easy way to figure out why this separation has occurred: market share. Monsanto, already the seed leader, pulled way ahead of the pack by 2009, leaving both DuPont (NYSE: DD  ) and Syngenta (NYSE: SYT  ) in the dust. Monsanto's most recently tallied market share bested both companies combined!

Are there other reasons for the market's preference for Monsanto? Let's take a look at a few key metrics to find out.

What you need to know
Monsanto isn't cheap compared to most of its peers, but it's got two things going for it: earnings stability and a strong net margin. The company's free cash flow is also a lot closer to its net income than most of its peers:

Company

P/E Ratio

Price to Free Cash Flow

3-Year Annualized Earnings Growth

Net Margin (TTM)

Monsanto 21.4 21.5 0.8% 15.8%
DuPont 12.7 15.2 26.2% 8.9%
Syngenta 19.2 22.6 5.3% 12.1%
Dow Chemical (NYSE: DOW  ) 13.7 27.7 86.8% 4.2%
Deere (NYSE: DE  ) 10.7 NM 50.4% 8.8%

Source: Morningstar. NM = not material because of negative results.


DuPont, Dow, and Deere all had a hefty rebound from the recession, but over the long run Monsanto's not only kept its earnings running strong, it's grown those earnings at a greater rate:

MON Net Income TTM Chart

MON Net Income TTM data by YCharts

Monsanto's seed focus helps keep those margins high, as it can offer patented varieties while simultaneously developing the next big thing. Monsanto's drought-resistant corn products are also sure to be in even higher demand now. This year's dry weather has created the worst drought in the United States since the '50s, affecting huge swaths of farmland across the country.

There are sure to be plenty of negative consequences of that drought, but it will push the entire farming industry toward hardier varieties. If you're going to bet on one company to come out ahead in these extreme weather conditions, Monsanto would be on top of the list.

On the other hand, Monsanto faces some opposition to its weed-killer developments. That could trip up the company if bug problems turn out to be a bigger threat than drought problems. A number of farmers have banded together to pressure government agencies to keep a closer eye on any new formulations, to ensure that whatever's sprayed over those amber waves of grain won't mess up the pinkish waves of human intestines that'll digest the grain later.

What's next?
Where does Monsanto go from here? That will depend on its ability to stay ahead of the curve, where both extreme weather conditions and nasty pests are concerned. The Motley Fool's CAPS community thinks Monsanto has a strong chance to outrun its challenges. Our CAPS players give it a four-star rating, with an impressive 96% of all active players expecting the stock to continue its 52-week trend higher. I'll add my vote to this group, and will place an outperform CAPScall on the stock today.

Interested in tracking this stock as it continues on its path? Add Monsanto to your watchlist now for all the news we Fools can find, delivered to your inbox as it happens. If you're looking for other stable stocks to anchor your portfolio's growth, The Motley Fool has three handpicked market champions in mind for you to buy today. Find out more about these great opportunities in our free report on the "3 Stocks That Will Help You Retire Rich."

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

Motley Fool newsletter services have recommended creating a modified stock repair against synthetic long position in Monsanto. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (5)

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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 July 17, 2012, at 2:29 PM, ajkmsteph wrote:

    weeds are not a problem in drought years. So this is not an issue this year and wasn't much a problem to begin with. Mon competitoir who want to sell higher value herbicides want to exaggerate the problems that are real but manageable. New herbicides will be coming along

  • Report this Comment On July 17, 2012, at 3:32 PM, funfundvierzig wrote:

    Investors value the much smaller Monsanto more than the entire DuPont conglomerate, chemicals, industrial materials, TIO2, food additives, Pioneer seeds and questionable ag chemicals (Imprelis, Tell Us!) and all. At yesterday's closing stock prices (July 16, 2012), investors have set a price tag on superior-managed Monsanto at $1 billion more than the much larger but lumbering DuPont, $45.6 billion versus $44.6 billion.

    In seeds, Monsanto continues formidably to out-research, out-innovate, out-market and out-sell the second largest global seed enterprise, DuPont Pioneer.

    ...funfun..

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