Images

Investors and consumers probably have very different views of Monsanto Company (NYSE:MON). Like it or not, the stock has absolutely crushed the returns of the broader market in the last 10 years. However, a handful of companies have since built robust seed, traits, and agricultural product businesses that offer respectable competition. Management is pretty optimistic that its long-term growth strategy, fueled by a mixture of new product launches and value-creating financial moves, will prove successful, but how can investors be sure? Is now a good time to pick Monsanto stock over the rest of the pack? Let's take a look at what makes the company stand out and how it stacks up to its peers from a valuation perspective.

Why Monsanto stands out

There's good reason for optimism. New product launches -- some of which are establishing entirely new platforms with substantial growth potential, such as The Climate Corporation and BioAg -- will boost revenue and earnings for the foreseeable future. While the resulting capital expenditures are expected to slash Monsanto's free cash flow by 60% in 2014, it's important to consider the long-term value creation. For instance, the company is on pace for double-digit growth in ongoing EBITDA and ongoing EPS.

G

Source: Monsanto Company earnings presentation.

Management's growth measures don't stop with besting EBITDA watermarks set in each of the last few years. Monsanto is on pace to double ongoing EPS from 2014 levels by the end of 2019. That would roughly keep pace with growth experienced in the first half of the decade.

G

Source: Monsanto Company earnings presentation.

If those targets can be met in the long term, then it would be pretty difficult to argue against investing in the company right now. Unless, of course, Monsanto's peers offer even better value.

Comparison to peers

There aren't many companies that exist on the heels of agricultural businesses alone, which makes any comparison between Monsanto and a peer group a bit awkward. Outside of Syngenta the remaining players with large stakes in sustainable agriculture have their hands in many unrelated cookie jars. But since we're considering each on an investment basis, perhaps investors can find better value in more diverse peers. Here's how four of the top seeds companies stack up with several useful valuation metrics.

Company

P/E

Enterprise Value/Revenue

Enterprise Value/EBITDA

Price to Tangible Book Value

Monsanto Company

23.0

4.0x

13.3x

4.6x

Syngenta

19.9

2.4x

12.9x

5.0x

The Dow Chemical Company

19.9

1.4x

10.7x

2.9x

DuPont

21.0

1.9x

11.4x

5.0x

Source: Yahoo! Finance.

Monsanto doesn't lead any valuation category, but it is valued roughly in line with its peers despite the diversity in businesses presented. However, even when compared to its closest peer Syngenta, the company fails to offer the best value. Investors would pay more for sales, EPS, and slightly more for EBITDA, although they would enjoy a slight advantage when it comes to tangible book value. The Dow Chemical Company still handily leads the pack. 

Investors shouldn't stop their research there. Perhaps there is a reason Monsanto is valued higher than its closest competitors. One way to find out is to look at the company's operational efficiency compared to its peers.

Company

Profit Margin

Operating Margin

Monsanto Company

17.2%

25.6%

Syngenta

11%

14.7%

The Dow Chemical Company

6.5%

8.3%

DuPont

8.4%

12.2%

Source: Yahoo! Finance.

After seeing the large differences in profit margin and operating margin compared to other seed, trait, and agricultural services companies it appears that investors are paying a slight premium for good reason. As simply demonstrated above, Monsanto boasts higher income margins than Syngenta and at least double those of more diverse peers.

Foolish bottom line

Despite handily beating the broader market in the previous 10 years, Monsanto appears to be fairly valued relative to its operating performance and compared to its peers. If you believe management can reach its targeted goals for EBITDA and EPS growth by the end of the decade, and new products continue to support industry-leading income margins, then now would be a great time to buy Monsanto stock. Just don't throw all caution to the wind.

Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolioCAPS pageprevious writing for The Motley Fool, or his work with SynBioBeta to keep up with developments in the synthetic biology industry.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.