Here's How Monsanto is Planting the Seeds of Future Profits

Monsanto  (NYSE: MON  ) , the biggest seed company in the world, is thriving right now, and it has corn and soybeans to thank for it. Those two segments comprise the vast majority of its business thanks to an aggressive investment strategy in these areas, and Monsanto's about to reap what it has sown.

Monsanto's timing is perfect, since the underlying economics of the agriculture industry are extremely favorable due to booming global populations and an unprecedented demand for food in emerging markets. For these reasons and more, the company has a bright future.

The key takeaways from Monsanto's earnings
Monsanto's recently released second-quarter earnings report showed great results. Total sales increased nearly 7% versus the same quarter the previous year. This was led by the company's corn and soybeans segment, which together represent nearly three-quarters of its total sales. This followed solid results in its first quarter as well, when Monsanto reported revenue and earnings-per-share growth of 7% and 8%, respectively.

Not only did Monsanto increase sales in the most recent quarter, but it's also expanding its margins. As its business expands, Monsanto is realizing economies of scale that are contributing to profits. Gross profit as a percentage of net sales widened by three points in the second quarter, from 56% to 59%.

Unfortunately, not all agriculture companies are thriving. Fertilizer producer Agrium (NYSE: AGU  ) warned investors its current-quarter earnings per share would be only slightly positive. That's due entirely to the late planting season this year. This is going to have an adverse effect on the timing of Agrium's wholesale and retail earnings.

Likewise, fellow fertilizer producer PotashCorp  (NYSE: POT  ) is still grappling with the breakup of a major European potash partnership last year. Its earnings suffered significantly last year, and management doesn't foresee business conditions reversing any time soon. Collapsing prices for its major nutrients resulted in full-year profits dropping 14% last year. These same conditions are expected to last throughout 2014, which is why PotashCorp expects earnings to fall another 21% this year.

As a result, it's clear Monsanto is leading the pack in the race to dominate the agriculture industry. To illustrate, its soybean sales set a quarterly record. Plainly stated, the company's corn and soybean seeds are seeing high demand that should last for the foreseeable future, particularly in emerging markets.

Emerging markets fuel the future
Monsanto's got a bright future ahead, thanks in part to strong tailwinds behind the global agriculture industry. Soaring global populations and rising standards of living mean millions of people are about to enter the middle class. This will result in rising demand for food, and increasing pressure to increase crop yields.

Not surprisingly, management sees 2014 shaping up to be a great year. The company confirmed its full-year earnings target. Management expects at least $5.10 per share in profits at the midpoint of its guidance range. That would represent nearly 12% growth over the $4.56 in EPS it generated last year.

Add it all up, and it's plain to see why Monsanto management is extremely confident. The company sees demand for corn and soybeans growing along with global populations (and incomes) for many years.

Monsanto has a great deal of momentum working in its favor, driven by the extremely positive underlying economics of the agriculture industry. Business conditions remain strong, particularly in the emerging markets. Under-developed nations are about to experience rising standards of living due to their strong rates of economic growth. These underpinnings will combine to propel Monsanto's sales and profits for many years ahead.

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Comments from our Foolish Readers

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 April 07, 2014, at 2:55 PM, stevebry56 wrote:

    Potash Corporation is the world’s largest producer of potash, nitrogen and phosphate fertilizers, and controls nearly 20% of the global supply of potash.

  • Report this Comment On April 07, 2014, at 2:58 PM, davidscott1 wrote:

    Potash Corporation earns a bulk of its revenues (42%) through the sales of potash, while phosphates account for 30% of its sales, and sales of nitrogenous fertilizers generate 28% of the company’s topline

  • Report this Comment On April 07, 2014, at 3:01 PM, stevebry56 wrote:

    For you info, Potash Corporation generates almost 58% of its sales in the US.

  • Report this Comment On April 07, 2014, at 3:05 PM, davidscott1 wrote:

    As per statistics China is expected to be 75% dependent on potash imports in the long run that will help the company like Potash Corporation to increase its revenues

  • Report this Comment On April 07, 2014, at 3:07 PM, stevebry56 wrote:

    Potash Corp expects the prices to range of potash will be between $240-270 per ton in 2014, based on estimates of potash futures prices that will increase the revenues of the company .

  • Report this Comment On April 07, 2014, at 3:08 PM, stevebry56 wrote:

    Potash Corp expects the prices to range of potash will be between $240-270 per ton in 2014, based on estimates of potash futures prices that will increase the revenues of the company

  • Report this Comment On April 07, 2014, at 3:14 PM, davidscott1 wrote:

    Potash Corp revenues declined 8% due to the fall in potash prices following changes in the structure of the global potash market and excess fertilizer supply as producers ramped up production which is why its stock price fell down for the time being

  • Report this Comment On April 07, 2014, at 3:16 PM, stevebry56 wrote:

    Revenues of Potash Corp are expected to fall a further 13.4% in fiscal year 2014 if current market dynamics persist .

  • Report this Comment On April 07, 2014, at 3:18 PM, davidscott1 wrote:

    Potash Corp has invested in offshore as well and earnings from its offshore investments contributed $276 million to its fiscal year 2013 bottom line

  • Report this Comment On April 07, 2014, at 3:19 PM, stevebry56 wrote:

    Potash Corp net margins in fiscal year 2013 was around 24.4%, 6% higher than the industry average in fiscal year 2013.

  • Report this Comment On April 07, 2014, at 3:21 PM, davidscott1 wrote:

    Potash Corp payout ratio was up 36 percentage points as dividend payments were maintained despite a fall in earnings

  • Report this Comment On April 07, 2014, at 3:24 PM, stevebry56 wrote:

    Potash Corp payout ratio is expected to climb to 84.8% in fiscal year 2014 if dividends are maintained around current levels and earnings continue falling.

  • Report this Comment On April 07, 2014, at 3:25 PM, davidscott1 wrote:

    Potash Corp stock yielded 3.95% of its price in dividends in fiscal year 2013, but based on estimated free cash flows for fiscal year 2014 it is not likely that the yield will be sustained at the current level

  • Report this Comment On April 07, 2014, at 3:28 PM, stevebry56 wrote:

    Potash Corp stock is currently trading at a one-year forward price-to-earnings multiple of 20x, which is well above the current industry average of 12.7x.

  • Report this Comment On April 07, 2014, at 3:29 PM, davidscott1 wrote:

    Potash Corp stock has shed 21% of its value over the last twelve months, and is currently trading for around $33 http://goo.gl/Gu7N08

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