How's this combination: leading-edge biotech products, fast-rising profits, and a broad portfolio of products? Welcome to the world of agriculture giant Monsanto (NYSE:MON).
While many will associate herbicides such as Roundup with Monsanto, herbicides are only 25% of Monsanto's latest quarter's sales and seem to be a declining percentage of the revenue mix. The big names at Monsanto today are familiar to farmers: Corn, soybean, and other crop seeds are now 62% of sales. This includes genetically modified seed products (or genomics, as Monsanto and industry wonks call them). In the latest quarter, net sales increased 27%, and net income shot up 154%.
Monsanto is aggressively expanding its seed portfolio by gobbling up well-positioned competitors to ensure it has a seed for every farm. In January, the company announced it was paying $1.4 billion for Seminis, the world's largest fruit and vegetable seed developer. In February, the company bolstered its cotton business with the agreement to purchase Emergent Genetics, the third largest cotton seed producer in the U.S. and India. The Emergent purchase is seen as a strong attempt to more effectively compete against leading cotton-seed companies such as Bayer (NYSE:BAY) and Delta & Pine (NYSE:DLP).
The competitive landscape is filled with giants. From BASF (NYSE:BF) to DuPont (NYSE:DD) to Syngenta (NYSE:SYT), the seed market is dominated by deep-pocket competitors. Monsanto, and its broad-based seed operation, is positioned to use its expertise in plant biotechnology, genomics, and breeding to improve productive capacity and to reduce the costs of farming -- and fatten its own cash coffers. Evaluating project-specific risk and strength of expected product rollouts is of paramount importance in an industry of this nature. Companies invest significant amounts (in cash and sweat) in each genetically modified seed to create a product of high quality, where other companies may well roll out better products at comparable price, effectively reducing or removing the return on investment.
If expected earnings are $2.10 for the fiscal year that ends in August 2005, the stock, which is up 1% as of this afternoon, is priced at roughly 30 times earnings. For comparison, the company expected to grow earnings by 19% (to $2.44) for the fiscal year ended 2006. The news is good at Monsanto, but the stock is up 66% over the last 52 weeks. In my opinion, investors would be wise to wait for a pullback before seeding their portfolio with this company.
Fool contributor W.D. Crotty does not own shares in any of the companies mentioned but will be using Bayer fire ant killer today to get the garden ready for seeding. Click here to see The Motley Fool's disclosure policy.
