1 Key Trait Fueling Growth at Monsanto Company

Monsanto’s second-quarter results point to the importance of soybeans to its overall business growth.

Apr 3, 2014 at 11:00AM
 Soybean Seeds

Monsanto's magic growth seeds? Photo credit: Flickr/www.WATTAgNet.com 

Monsanto (NYSE:MON) recently reported strong second-quarter results. The ag giant beat Wall Street's earnings and revenue estimates while reaffirming its full-year outlook. One key trait fueled Monsanto's results in the face of industry headwinds: soybeans. Let's take a closer look at how this legume is growing in importance to Monsanto and what that means for investors.

Green shoots of growth
Overall, Monsanto's sales continue to be dominated by corn. In the second quarter, the corn seeds and traits business delivered $3.4 billion in sales, which is about 4% higher than the year-ago period. Sales of corn seeds and traits represent nearly 60% of Monsanto's revenue and 71% of its gross profit. 

 Corn In Pan

Photo credit: Flickr/Caitlin Regan.

Needless to say, corn is critical to the company. However, seeds and traits in general are an important driver of Monsanto's growth. CEO Hugh Grant noted in the company's earnings release that "nearly 80% of our growth in the quarter came from our core seeds and traits business." While corn is the dominant trait, Monsanto did see strong year-over-year growth in its soybean seed and traits segment. Revenue of $820 million in the soybean segment was 21% higher than last year. Meanwhile, gross profit in the segment grew by 36% over last year's second quarter. Both were quarterly records for the segment.

Monsanto reached 3 million acres of its Intacta RR2 PRO soybeans, which powered the growth of the soybean segment. That was the largest launch of a soybean trait in the company's history and provided a revolutionary new platform for Latin American soybean growers. Given the more than four bushels per acre yield harvest advantage against the first generation of Roundup Ready soybeans, it appears Monsanto has a winner on its hands.

Soybean Growth

Photo credit: Flickr/United Soybean Board.

Can the competition catch up?
This latest soybean launch should keep Monsanto one step ahead of competitors such as Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD). Dow isn't expected to launch its newest soybean trait -- the Enlist -- until next year. However, it will follow that launch with Enlist E3 soybeans in 2016 and a novel 2-Bt trait for soybeans after 2016, so it's working hard to provide the soybeans that farmers want to grow. 

Meanwhile, DuPont signed a technology licensing agreement with Monsanto last year that covers its next-generation soybean technology. Because of that DuPont will pay Monsanto royalties on future soybean sales. 

Investor takeaway
While corn continues to be the trait driving Monsanto's business, soybeans are the key to its growth. Not only is the company staying ahead of the competition, but its licensing agreement with DuPont means its rivals are paying for the privilege of working with Monsanto on the next generation of soybeans. 

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Matt DiLallo has the following options: long January 2015 $70 calls on Monsanto, short January 2015 $70 puts on Monsanto, and short July 2014 $105 calls on Monsanto. The Motley Fool has no position in any of the stocks mentioned. 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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