Foolish Forecast: Can Monsanto Make Its Growth Last?

The release of Monsanto's (NYSE: MON  ) second-quarter earnings report means that spring is upon us. Investors can catch up with the agricultural giant midweek, but here's a sneak peek at what they'll find.

What Fools say:
Fools certainly think highly of the agricultural sector, but also think it has room to improve. Monsanto, like its peers and competitors, snags four out of five stars on Motley Fool CAPS.

Market Cap (millions)

Trailing P/E Ratio

CAPS Rating

DuPont (NYSE:DD)

$41,815

14.4

****

Mosaic (NYSE:MOS)

$46,703

49.5

****

Potash Corp. of Saskatchewan (NYSE:POT)

$49,632

46.3

****

Deere (NYSE:DE)

$34,857

18.5

****

Monsanto

$62,636

58.7

****

Sources: Motley Fool CAPS and Capital IQ, a division of Standard & Poor's.

Here's what a few CAPS players have said about the stock recently:

  • salvows, "Monsanto seeds create the most corn per acre of any seeds on the market right now and demand for agricultural products, and corn specifically, is poised to rise over the next few years."
  • phildar: "Global food shortages ensure revenues for this company for a long while. It's in the seeds."
  • And the very short but sweet by robinrdrn, "Everybody needs to eat."  

What management says:
Monsanto has had nothing but good news for investors. The increased price of grains and soybeans has increased the amount of planted acres, leading to increased revenues from sales of seeds and RoundUp herbicides. Management has announced three increases to yearly guidance in as many months. It's most recent quarterly guidance of $1.75 per share, excluding a one-time payment from its spinoff Solutia (NYSE: SOA  ) , was released just last week, so I'll be surprised if it doesn't hit that number square on the nose.

While I'm sure management is enjoying every minute of this run-up, it's clear to me they also understand that the long-term future of the company doesn't rely on the price of grain, but on the company's ability to increase production by offering seeds with new trait combinations.

What management does:

Margins

8/31/06

11/30/06

2/28/07

5/31/07

8/31/07

11/30/07

Gross

48.9%

48.7%

48.6%

49.4%

50.1%

51.1%

Operating

16.7%

16.5%

17.3%

19.3%

18.9%

20.7%

Net

9.4%

9.7%

10.4%

12.6%

11.6%

12.7%

FCF/Revenue

17.9%

14.7%

18.6%

13.6%

15.7%

18.4%

Growth (YOY)

8/31/2006

11/30/2006

2/28/2007

5/31/2007

8/31/2007

11/30/2007

Revenue

16.2%

12.1%

14.3%

17.4%

17.4%

22.8%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

Management had set a goal of 52%-54% gross margin by 2012, but as gross margins have increased so rapidly, management now believes that it can reach that goal two years early. With revenue rising faster than costs, net and operating margins are also on the rise. That's great news as long as management can keep it up.

One Fool says:
Corn prices are rising because of demand for biofuels, while the high price of oil helps drive that demand. In turn, high corn prices are increasing the number of acres being planted, which allows Monsanto to increase its market share, as well as its prices.

Sounds great, but I'm not convinced the commodities bull market will last forever. I think Monsanto's growth is ultimately tied to its ability to increase crop yields through science, because then it can justify raising seed prices even if grain prices don't rise. Fortunately management seems to agree, so even if commodities pull back a little, the company should be OK in the long term.


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