As the world’s population continues to grow, farmers are scrambling to find ways to boost productivity of their crops. This has definitely been a nice trend for Monsanto (NYSE:MON), which is a top provider of seeds and other agricultural products.
And the company’s shareholders have reaped the rewards: the stock is up nearly 46% in the last 12 months.
Based on its latest quarterly report, it looks like the company’s momentum is strong. Momentum beat Wall Street’s third-quarter profit expectations on revenue that rose 21.2%.
Can the good times continue? Let’s take a look at the pros and cons:
Pros
Balanced portfolio. Monsanto produces seeds, biotechnology trait products and herbicides for plants like corn, soybeans, cotton and canola.
However, it is the company’s Seeds and Genomics segment that is the big growth driver. Its brands include Dekalb, Deltapine and Seminis, which help to deal with insects and weeds.
Research and development. This has been a critical part of Monsanto’s success. In fact, the company may spend as much as $1.5 billion on R&D for the year. As should be no surprise, the patent portfolio is extensive and global.
Foreign markets. Monsanto has been investing heavily in countries like Brazil and Argentina. They should provide the potential for strong long-term growth.
Cons
Business practices. The Securities and Exchange Commission is conducting an investigation into Monsanto’s customer incentive programs for its glyphosate products. It is still in the early stages – but such investigations can definitely be a distraction.
Public perception. No doubt, genetically engineered seeds are controversial. Might they have long-term negative impacts? In other words, there may be growing opposition to Monsanto’s products and perhaps increased regulations. This is especially the case in Europe.
Competition. There are big players in the market, such as Syngenta (NYSE:SYT) and DuPont (NYSE:DD). In fact, because of Monsanto’s high-end technologies, its seeds tend to sell at premium prices. That can make it tough to convince farmers to move over to these offerings. After all, the lower-cost alternatives work quite well. This was the case with Monsanto’s Roundup herbicide, which suffered from generic products.
Verdict
The global agriculture industry certainly has a promising future. And Monsanto is nicely positioned.
Even in the short run, there should also be strength, as crop prices have generally increased. Thus, as farmers see higher profits, they are likely to consider products from Monsanto.
The company’s stock price is not cheap, coming to 26 times earnings. But growth usually comes at a premium — the pros outweigh the cons on Monsanto.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
