Like It or Not, GMO Protests Won't Slow Monsanto Company or Its Shares

Monsanto (NYSE: MON  ) detractors may be growing in number the world over, but none of it is hurting the company, or its investors. After Wells Fargo upgraded its price target on the stock following the company's impressive first-quarter performance, it's JPMorgan Chase's turn to go bullish on Monsanto now.

Impressed by the company's good second-quarter numbers, JPMorgan upgraded Monsanto stock to "overweight" and upped its price target to $125 a share. That sounds good, but given the growth catalysts, I find JPMorgan's price target still conservative, and I believe that Monsanto could fly higher this year. But for those who want to draw a parallel with arch-rival DuPont (NYSE: DD  ) , beware: The tailwinds may not favor DuPont as much.

Did you notice this?
Investors may have focused on just the numbers -- Monsanto's Q2 revenue and net income climbed 7% and 13% year over year, respectively -- but the real story lies in how the company boosted its top and bottom lines.

Source: Monsanto.

Some analysts expected lower corn acreage to hurt Monsanto, since corn is the biggest revenue driver for the company. In a report released Monday, the U.S. Department of Agriculture projected soybean acreage to jump 6% to record 81.5 million acres in 2014, even as corn acreage is forecast to slip 4% to 91.7 million acres.

But Monsanto's foothold in the soybean market is as strong as that in corn, thanks to its hugely popular Roundup Ready and Intacta traits. Its soybean seed sales jumped sharply in each of the past two quarters, registering 16% and 21% year-over-year growth in Q1 and Q2, respectively.

This should excite you
What really struck me was the staggering 36% year-over-year jump in Monsanto's Q2 gross profit from soybeans. Now here's why you, as a Monsanto investor, should be excited: Soybeans contributed only 18% to Monsanto's total seed sales during the six months through February, but its gross margin at 65% was at par with corn gross margin. In fact, soybean margin jumped a remarkable nine percentage points during the six-month period even as corn margin improved only two percentage points.

Intacta RR2 PRO. Source: Monsanto.

In other words, soybeans are as profitable to Monsanto as corn, which means that the company should be able to churn greater profits even if corn seeds slow down, as they did during the past two quarters. That's great news for investors, especially since soybeans will remain the theme for 2014.

Geared for a strong second half
If Monsanto's Roundup Ready 2 Yield soybeans are driving sales in the U.S., its Intacta trait is ready to take the other key market, Latin America, by storm. The company's second-quarter earnings call brought to light some amazing facts about Intacta, which suggest how big the opportunity really is.

  • During the very first season of launch last year, Intacta RR2 PRO covered an astounding 3 million acres in Brazil, making it Monsanto's largest-ever soybean trait launch.
     
  • More than 13,000 farmers opted for Intacta RR2 PRO in Brazil. Comparatively, just about 1,000 farmers participated during the trial program last year.
     
  • Monsanto hit the market with 35 varieties of the Intacta trait. That's double the number of varieties it rolled out for the Roundup Ready 2 Yield in the U.S. four years back.
     
  • Intacta RR2 PRO is delivering as projected during the trials, yielding an advantage of four bushels per acre against Monsanto's first-generation Roundup Ready soybeans.
     
  • Monsanto will ramp up Intacta faster than any other soybean trait so far. It is already developing the second and third generation of the trait and is on track to commercially launch it in Argentina next year.

Monsanto projects its sales from soybeans to grow a massive $1 billion over the next five years, backed by Intacta, Roundup Ready 2 Yield, and the Roundup Ready 2 Xtend (pending approval) platforms. Cross-licensing agreements with competitors should play a big role in the company's growth.

Monsanto appears unbeatable
DuPont Pioneer started offering Roundup Ready 2 Yield soybeans this year and will offer Roundup Ready 2 Xtend from 2015. DuPont will pay $200 million annually beginning this year, with Monsanto booking the first installment in Q2. Additionally, DuPont will pay a minimum annual royalty of $950 million beginning in 2018. Likewise, Syngenta (NYSE: SYT  ) also offers the Roundup Ready 2 Yield soybeans in return for royalty payments.

Only Dow Chemical (NYSE: DOW  ) could emerge a threat if its controversial herbicide-tolerant Enlist E3 soybeans hit the launch pad. Enlist E3 is glyphosate tolerant, which is a direct dig at Monsanto's glyphosate-based Roundup. Small wonder, then, that Dow is expecting significant market share gains once Enlist E3 is out.

But Dow's dreams could still be years away. As of now, given that Monsanto's Roundup trait covers more than 90% of the soybean acres in the U.S., and the company already has 85% of the Brazilian soybean market under its belt, no other company can come even close to competing.

Foolish takeaway
Monsanto advanced a record number of 29 products last year, ensuring that it remains a leader in the global seed business. The company's full-year earnings guidance of $5.00 and $5.20 a share represents at least a good 10% upside over 2013.

What's more, Monsanto is ready to return "significantly more than the free cash" it generates this year to shareholders as dividends and share buybacks. That's a double boon for investors, provided the stock continues to move up. I don't see any reason it shouldn't.

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Read/Post Comments (5) | Recommend This Article (1)

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 06, 2014, at 2:09 PM, funfundvierzig wrote:

    Thank you, Neha Chamaria, for another penetrating and detailed analysis of the global business of seed biotechnology. ...funfun..

  • Report this Comment On April 06, 2014, at 4:35 PM, getthetruth2 wrote:

    I think you have teh numbers wrong:

    1. The Dupont fee for soybeans may not come until Q4 not in Q2.I listened to the investor talk. Maybe I am wrong.

    2. Starting in 2018 its not $900M a year from dupont its $900 + minumum spread over several years

  • Report this Comment On April 06, 2014, at 4:42 PM, getthetruth2 wrote:

    here is a quote from their press release when thet anounced the deal

    Additionally, beginning in 2018, DuPont Pioneer will pay royalties on a per unit basis of Genuity Roundup Ready 2 Yield® and Genuity Roundup Ready 2 Xtend™ for the life of the agreement for continued technology access, subject to annual minimum payments through 2023 totaling $950 million.

    So that's $950 M minimum spread over 5 years. Not $950 M a year !

  • Report this Comment On April 06, 2014, at 4:53 PM, getthetruth2 wrote:

    here is a quote from the investor meeting last week:

    Brett Begemann

    Yeah. You will see really the second big increment of all of those factors that you mentioned show in the fourth quarter for soybeans. You'll have that second DuPont royalty and you'll actually start seeing Intacta sales for the next season showing up in the fourth quarter as well.

    I thought that they had a payment last year Q4 and this second payment would be Q4 2014 but I guess its possibloe that get two payments per year one in Q2 and one in Q4. But they don't really know what farnmers have bought and planted until Q4 so my guess is the second payment that is mentioned above is the 2014 single payment of $200M

  • Report this Comment On April 06, 2014, at 6:28 PM, funfundvierzig wrote:

    Bottom-line, the lumbering DuPont conglomerate is a pronounced laggard to Monsanto, and is compelled to shell out hundreds of $millions in license fees in order to put Monsanto's superior GM traits in DuPont Pioneer's otherwise inferior conventional seed line-up. That's a huge gap favouring Monsanto shareholders for years to come.

    ...funfun..

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