An investment in agricultural product firm Monsanto
To quickly get you up to speed, Monsanto cultivated an impressive second quarter by posting double-digit sales and earnings growth, and increased this year's guidance as the growing craze for ethanol heats up demand and supply dynamics for corn, a key ingredient in domestic ethanol production. Corn seed and traits segment sales jumped 47% in the quarter, while herbicide sales, primarily related to the company's Roundup brand, also had decent gains.
Due to the strong stock run, most of the good news looks to be reflected in the share price. Monsanto now trades at 35 times forward earnings, meaning investors expect the company to bag many more years of robust growth trends. But as a result, the market appears overly focused on the reward side of the equation and may not be giving proper consideration to the risks facing the company.
Fellow Fool Alyce Lomax detailed some of the "kernels of a controversy" swaying around Monsanto, highlighted by one of the most extensive legal proceedings sections in a 10-K I've ever seen. In many respects the company's genetic modification of seeds is a trailblazing business without a sufficient history to foretell the long-term effects on farming, crops, and consumers. Litigation is one way the market is wading through this uncertainty, while the Food and Drug Administration and food retailers such as Whole Foods
From an investment perspective, I don't believe Monsanto's current valuation is properly discounting these concerns. The upside for Monsanto and rivals such as Syngenta
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Fool contributor Ryan Fuhrmann is long shares of Whole Foods but has no financial interest in any other company mentioned. Feel free to email him with feedback or to further discuss any companies mentioned. Whole Foods and Biogen Idec are Stock Advisor recommendations.The Fool has an ironclad disclosure policy.