Agribiotech Monsanto (MON) is always going to be a lightning rod for criticism and scrutiny -- well, more so than other seed trait and chemical companies like DuPont (DD), Syngenta (NYSE: SYT), and Dow Chemical (NYSE: DOW). Even so, the company's significant sustained yield advantages and its deep, expanding pipeline make it a company and a stock well worth watching. Should the company's more recent efforts in RNA interference, integrated farming planning/management, and biologicals pay off, there could appealing upside to today's price.
Fiscal First Quarter Results Not As Strong As You Might Like
Monsanto reported what looked like a strong fiscal first quarter, but the details matter. Revenue rose 7% and beat estimates by about 2%, but the upside was driven by the company's "Ag Productivity" segment (the company's herbicide operations). Seed and trait sales were down 5% in a seasonally slow quarter, with corn down 7% (more than 60% of sales) and soybeans up 16% (about 16% of sales). Ag Productivity sales jumped 24% as the company saw solid pricing.
Margins were similarly mixed. Overall gross margin improved more than two points, and that was better than the Street expected. Seed/trait margin was about a point better than expected (and up almost two points), while Ag Productivity saw a seven-point improvement as Monsanto leveraged its advantaged position on the global cost curve.
All things considered, this was a beat, but not the kind of beat Monsanto investors really want. The per-share outperformance was largely a product of the Ag Productivity business (as well as a lower sharecount from buybacks), but competing with Dow, DuPont, and FMC (NYSE: FMC) in herbicides is not really going to unlock a steady stream of value for shareholders.
A Strong Pipeline Update
Monsanto announced that 29 projects were added or advanced in its pipeline, the largest number I can recall. SmartStax PRO, a 2nd-generation Intacta soybean, and Bollgard III cotton are all now in Phase 4, while an herbicide-tolerant wheat variety is in Phase 2 testing.
Looking at existing products, Monsanto earlier reported a seven-bushel/acre yield advantage for its Dekalb seeds, while the DroughtGard drought-resistant corn variety delivered a five-bushel/acre yield improvement over competing drought-resistant hybrids from DuPont (Aquamax) and Syngenta (Agrisure). Given Monsanto's historical relative weakness in drier Western states, this could be an important competitive driver for the company against DuPont and Syngenta even if corn acreage declines.
Big Bio Opportunities Underway
Monsanto also continues to expand its opportunity set with biological tools to combat pests and weeds. The company is looking to RNA-interference technology to move beyond its traditional Bt gene approach in dealing with rootworms and other crop pests.
Monsanto also has its BioDirect platform that is looking at a range of nontransgenic technologies that can be delivered as topical treatments. In addition to products for glycophosphate-resistant weeds, tospovirus, and the Colorado potato beetle, Monsanto has a product targeting the Varroa mite that preys upon honeybees. An early stage trial showed an approximately 10% survival rate for mites exposed to the product, and the company is working on other treatments for viruses that attack honeybees.
Monsanto also recently expanded its BioDirect business with its BioAg Alliance with Novozymes. Monsanto paid $300 million for a 50% stake in Novozymes' BioAg business, where the company has been working on topical microbes that improve nutrient uptake and improve yields.
IFS Will Take Some Time, But The Upside Is Large
Last and by no means least is Monsanto's Integrated Farming Systems business. A few months ago the company spent more than $900 million for Climate Control, a weather analytics firm that combines hyper-local forecasting data with agronomic decision-making tools. Monsanto has folded this in with its Precision Planting and FieldScripts platforms to create an integrated solution that provides farmers with detailed decision-making aids for a variety of the steps that go into planning, planting, and harvesting fields.
Early field trials have shown yield improvements of five to 10 acres, and while it will take years for this offering to mature (farmers can be a conservative lot), that sort of yield improvement would mean billions to Monsanto at a price of $10 to $15 an acre. Importantly, while DuPont is working with Deere on the Field360 system, their approach does not appear to be as robust at present, and it appears to lack the weather analytics capabilities.
The Bottom Line
It's too soon for me to really plug those billions of potential IFS revenue into my Monsanto model, but I do believe it represents significant upside to long-term revenue and margins. As is, I'm looking for mid-to-high single digit long-term revenue growth and low teens free cash flow growth as the company increases its share in the U.S. and Latin America, and establishes a presence in Eastern Europe.
Those growth rates point to a fair value of around $115 today, and I'm a little concerned at what seems to be an outsized bullishness on the shares from the sell-side (18 buys/strong buys against three hold and one underperform). Even so, the company's pipeline has been delivering some very solid results and I believe the company's embrace of more comprehensive farming technology gives upside to the company's long-term value.