Monsanto - Hopefully This Is It

The old saw on Wall Street is that bad news come in threes, so maybe Monsanto (NYSE: MON) has finally finished this craptastic cycle of underperformance and reset expectations. Monsanto's fiscal fourth quarter wasn't great, but it could have been worse and investors seem reasonably pleased with the guidance for the next year.

Monsanto reported sales growth of 4% for the quarter, with 7% growth in seeds offsetting 1% growth in the herbicide business. Given all of the angst and hand-wringing about Round-Up, I was a little surprised to see even that much growth there.

That herbicide business did hurt margins, though, as a big jump in seed gross margin (54% vs. 46%) was not enough to power an overall improvement. Instead, company-wide margins fell to 44% from 46%.

Looking to the next year; management forecast a range of EPS for 2.72 to 2.82; below the consensus of 2.82 but apparently good enough for many investors - the stock was indicated up about a point in early trading.

As for the current big worry, the yield of the SmartStax seeds, the jury is still out. Some early results seem to indicate that SmartStax is underperforming the older triple-stacked seed by 4.7 bushels per acre - a big underperformance relative to target of 15 bushel outperformance. Now, the data is still really early (not statistically significant) and there are signs of optimism - I found some data (from Illinois, I think) that showed a double-digit improvement in SmartStax versus the triple-stacked. So, it's not looking great yet, but the story is not over.

Interestingly, for all the talk of a rebound in DuPont's (NYSE: DD) Pioneer business, the data is not all that favorable. I found some data from Purdue that indicated that Monsanto had a nearly 5 bushel-per-acre advantage over Pioneer/DuPont. Now, that is down a lot from the 14+ advantage in 2009, but it is not as though DuPont is outperforming in overall productivity. Still, that is a limited sample and we will not know for a while what the real numbers are for these competitors.

I am absolutely talking my book here, but I still think risk-tolerant investors can buy Monsanto and make a lot of money over the next few years. I know I have complained about Monsanto a lot and suggested that it is a risky idea, but it is also an undervalued stock. I think this stock is worth at least $70 here unless the bottom falls out ... and given the company's incredible R&D assets, I just do not see that happening. So, I do think you can buy it here and prosper long-term ... but be prepared for some frustration and aggravation along the way.

Disclosure - I own shares of Monsanto