Thursday, January 6, 2011

A Blessedly Quiet Quarter For Monsanto

It looks things have finally quieted down a bit at Monsanto (NYSE: MON). After a string of bad results, lower guidance, and widespread commentary that Syngenta (NYSE: SYT) and DuPont (NYSE:DD) had closed the gap and would take the lead over Monsanto, this company seems to have at least found a base of stability. Of course, the fiscal first quarter is usually a very quiet quarter for the company, so that "good news" only goes so far.

The company did report sales growth of 8% and managed to slightly exceed the consensus guess of analysts. Gross profits were up 11%. Looking closer, I would have liked to have seen better from the seed business (up around 14%), but the fertilizer business did alright (though down about 2%).

On the R&D front, the company reported higher spending to the tune of 13% growth. Nine pipeline projects advanced, and the company now has 5 Phase 4 projects - including the high-potential drought-resistant corn seed that should be launched in 2012/2013. The collaboration with BASF seems to be paying off, though I wish the company had more to brag about in terms of high-value projects in soybeans, cotton and canola. All of the high-value pipeline projects seemed to be concentrated in corn (which is a huge market, to be sure). Then again, a long stream of mid-value soybean, cotton, and canola projects could be very lucrative (the difference, I suppose, between swinging for home runs and consistently hitting singles and doubles).

The company really didn't change its guidance, so I expect investors to be nervous into and through the second quarter. To that end, I would expect a lot of volatility in the shares as analysts read (or invent) the tea leaves along the way. The second quarter is the company's biggest and they really need to perform well here to get investors excited about the company. I happen to firmly believe in the long-term prospects, but a little near-term performance wouldn't be so terrible either.

I am curious to see what the company plans to do with its cash pile and its M&A strategy. I don't see much that the company would buy in the seed business, though I acknowledge there are numerous private companies out there and I'm  not 100% up-to-speed on all of them. And I suppose it's not crazy that they could be interested in a company like Amyris (Nasdaq: AMRS). It also would not shock me if the company decided to expand its fertilizer business - I don't think the market would like that at all (putting capital into a cyclical business that doesn't have the ROIC potential of the seed trait business), but it could make a certain amount of sense.

At this point, I see a fair value of about $79 on Monsanto shares. That does not seem like a great bargain relative to today's price, but I think my estimates are a little conservative. I'm only looking for about 10% revenue growth per annum and a free cash flow yield of 18% in five years' time - I think the company could easily surpass both metrics.

BUY Monsanto

Disclosure: I own shares of Monsanto

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