The wait goes on for S&W Seed Company (NASDAQ:SANW) (or "S&W") to prove its merits as an under-followed player in the ag space. The shares are down another 17% from my last update, about flat over the last year, and down 40% over the past two years. Weak as that may be, S&W has actually outperformed Monsanto (NYSE:MON) since June and over the past year, as there's been a sharper reaction to Monsanto's negative revisions.
Not a lot has changed from a fundamental perspective since last June,
though a disappointing harvest in 2015 is going to have near-term
repercussions on margins. The key debate around S&W, at least in my
thinking, remains whether the company can successfully shift farmers
from public/generic seed varieties and share in a larger proportion of
the value created by its yield-enhanced and other proprietary alfalfa
seed varieties. My low double-digit annualized revenue growth estimate
is hardly conservative, but S&W could achieve it with a combination
of low single-digit acreage growth and an improvement in value capture
from less than 10% to less than 20% - still well below the 25%-plus that
Monsanto and DuPont (NYSE:DD) can reliably get from their corn and soybean varieties.
If S&W can do it, and achieve a long-term gross margin above 30%
and a long-term operating margin in the mid-teens, a fair value of over
$6 still remains in play after a recent dilutive financing.
Waiting For The Grass To Grow At S & W Seed Company