I've had some harsh things to say about Monsanto (NYSE: MON) in the past, but there's no arguing with the company's latest results. Sales in almost every segment increased markedly, while operating margins opened wide enough to let profits through, as opposed to last year's essentially flat quarter. Monsanto also reaffirmed its full-year earnings guidance, leaning toward the high end of the range with growth in the mid-teens.

I still have certain concerns about Monsanto, but I believe strong growth is still ahead for the company, and I don't believe the market is fully recognizing its value. Read on to see why I'm making a CAPScall on this company.

The world is overrun with new shades of green
One problem I've highlighted before is that some of Monsanto's most important products appear to be losing effectiveness, such as the weed-killer Roundup. Roundup is important in itself, but many of the company's best-selling seeds are popular because they are "Roundup-ready," enabling farmers to spray copious amounts of weed-killer without worrying about killing their crops at the same time. Unfortunately, nature will have its revenge, and the widespread use of Roundup has led to the emergence of Roundup-tolerant "superweeds."

Similarly, the EPA recently announced that corn rootworms in Iowa and Illinois may have developed a resistance to a strain of corn Monsanto developed. The corn has a special gene designed to make it poisonous to these insects, but some researchers have been finding many acres destroyed by the rootworms anyway.

The increasing ineffectiveness of Monsanto's products creates an opening for competitors. An insect-resistant corn developed by DuPont (NYSE: DD) and Dow Chemical (NYSE: DOW) so far hasn't shown any sign of becoming ineffective. Farmers may begin to switch to that product if Monsanto's continues to have problems, and other competitors are sure to try to exploit this weakness as well.

And I know you're waiting for the ironic ending
These problems would play wonderfully into a bearish thesis, but strangely the data just doesn't agree with the story. Monsanto is, in fact, growing its market share, and quite rapidly, too. From 2006 to 2009, the top four seed companies grew from 49% of the global seed market to 58%. But take a look at where the growth actually came from.

Company

2006 Market Share

2009 Market Share

Change (in percentage points)

Monsanto 21% 27% 6%
DuPont 14% 17% 3%
Syngenta 9% 9% 0%
Groupe Limagrain 5% 5% 0%

Source: ETC Group

Monsanto controls over a quarter of the global proprietary seed market and the gap between it and its nearest competitors is widening.

Part of the reason Monsanto's market share is growing is because it gets almost half its sales internationally, allowing it to tap into less-saturated markets. While the superweed problem exists all over the world, it isn't as prevalent in some areas as it is in the United States. Roundup isn't as commonly used yet in certain emerging markets, and Roundup Ready seeds have only recently been approved in even some developed markets. Superweeds will likely become more rampant in these new markets, but not yet, buying Monsanto time to solve the problem.

Meanwhile, even if Monsanto's competitors do gain an edge, many of their own products incorporate chemicals and gene traits that are licensed from Monsanto.

Drop your seeds there, let them go
Monsanto's products don't focus exclusively on herbicides and pesticides. The company is trying to redefine itself as a "yield company" by moving to a more diversified mix of plant nutrition products and focusing its research on developing seeds that use fertilizer more efficiently, and tolerate periods of intense heat and drought. These qualities will be important to help double crop output by 2050, which the UN believes will be necessary to feed a growing population.

Going forward, the massive moat around the company puts it in a prime position to benefit from a very long-term growth trend, making this one stock to buy and hold for a long time. I'll be adding it to my CAPS profile, and you can follow along by adding it to your own or to My Watchlist.

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