Monsanto (MON)
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Monsanto (MON: Charts, News, Offers) , the leader in genetically modified crops, received a huge boost on Thursday due to a spike in wheat futures to two-year highs. Monsanto was trading at 61.56 on Thursday, with a forward P/E of 20.5 and a recently increased quarterly dividend of .28. Monsanto, which has risen 44% since the beginning of June, is still far off its highs 2 years ago when it sailed to $140/share. Can this much reviled, yet market-leading maker of so-called “Frankenfoods”, criticized for its cozy political connections and “gestapo-like” treatment of farmers, bounce back and increase its global market share?
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Stock Analysis
Monsanto’s business is comprised of two main sectors: chemical (“Agricultural Improvement”), totaling 1/3 of gross profit, and genetically modified crops (“Seeds and Traits”) at 2/3. The Agricultural Improvement sector is focused on herbicides and lawn treatments to improve farmers’ crop yields as well as, on a smaller scale, bovine hormones used to increase milk production. Monsanto’s RoundUp herbicides, invented in house, in the past comprised up to 40% of the company’s gross profits. However, the patent for RoundUp’s active ingredient, glyphosate herbicide, has since expired and generics have reduced the price from $10/kg to $3/kg. In response, Monsanto has consolidated its RoundUp division and diverged funding to the Seeds and Traits sector, a move which triggered an investor lawsuit due to the resulting lowered EPS and FCF guidance. The Seeds and Traits sector contains many of Monsanto’s most controversial products – genetically modified corn, cotton, canola and soybean seeds. These seeds have higher yields, are more pesticide resistant and are now equipped with a “terminator gene” that cancels any chance of reproduction or cross pollination. In the past, Monsanto increased production of its genetically modified corn seeds in order to meet the high demands for corn – for ethanol production and corn-based products such as corn syrup. Since then, ethanol, along with crude oil demand have declined dramatically, leading to a 70% plunge in corn prices. Despite this, Monsanto continues to promote its flagship corn product, SmartStax, which promises farm-wide yield increases of up to 10% with the use of 70% less pesticides.
Due to the cutting-edge nature of Monsanto genetically modified seeds, the company has taken an increasingly defensive position to keep their modified crops from being hoarded, reproduced or cross pollinated. The factory-farming documentary Food, Inc, articles from Vanity Fair and Vogue, have all vilified Monsanto. It was reported that Monsanto-partnered farmers were asked to return all unused seeds and policed vigorously to insure that no seeds were hoarded or planted with intent to produce new seeds. Monsanto has sued individual farmers for these violations, and has even sued farmers whose crops were inadvertently cross pollinated by neighboring Monsanto-partnered fields. Monsanto has won every single intellectual property lawsuit it has instigated against these farmers. These lawsuits are now less common due to the use of the aforementioned one-use “terminator gene” in current seed products. In addition, prior to the expiration of the RoundUp patent, Monsanto sold genetically modified RoundUp Ready soybean seeds across America which were completely resistant to their own pesticides. Soybean farmers who didn’t switch to the Monsanto pairing quickly lost business to others, and using this method Monsanto spread quickly across large farming areas of America.
Monsanto’s considerable political weight in America has long been its backbone. The current senior adviser to the FDA, Michael R. Taylor, was a former Monsanto lobbyist. Justice Clarence Thomas was once Monsanto’s company attorney. Former Defense Secretary Donald Rumsfeld was the CEO of G. D. Searle & Co, which was purchased by Monsanto, which earned him a profit of $12 million. Many other key members of the FDA have worked at Monsanto in high executive positions. In 2008 it spent nearly $9 million on lobbying and has its own political action committee. For these reasons, Monsanto has gone relatively unhindered in the United States despite considerable protest from environmental and labor groups. However, Monsanto has not had such fortune in Europe. Germany, Austria, Hungary and France have all banned a line of Monsanto corn, citing health concerns over genetically modified products.
The future of Monsanto, in the long run, will firstly be heavily influenced by the decrease of arable land across the world. In the past decade, the global population has increased 12% while farm acreage has increased a mere 2%. This is very important for developing markets such as Brazil, China and India, which have 7%,15% and 49% arable land, respectively. To increase the amount of arable land and usable crops, these countries will likely have to increase the usage of fertilizers and specialized, bio-engineered seeds which would benefit Monsanto. Secondly, Monsanto’s growth will be shaped by the global perception of genetically modified foods, and the willingness of aforementioned key EU countries to accept them. Lastly, growing competition from agricultural chemical producers DuPont (
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Monsanto’s most current Q3 FY2010 earnings reflect a 6% decrease in net sales (3.1 to 2.9 billion) and 22% decrease in net profit (1.8 to 1.4 billion). Net income dropped an alarming 45% (694 to 384 million), with most of the losses attributed to increased R&D and restructuring costs. However, at these levels, MON should be considered a safe long-term, dividend holding, a wager with significant upside potential that an explosive global population will increase the demand for food, which eventually will only be sustainable through the use of genetically modified crops, where Monsanto is the market leader.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the
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