Ticonderoga Securities analyst Mark Gulley downgraded Monsanto (NYSE:MON) in October from “buy” to “neutral,” suggesting fertilizer stocks provide investors more upside than Monsanto’s agricultural biotechnology. One fertilizer company analysts are high on is CF industries (NYSE:CF), which has gained 40% in the past 30 days compared to 15% for Monsanto.
Morgan Stanley has an “overweight” rating on CF with a $215 target price on its stock. I don’t usually take analyst ratings into account when seeking good investments, but in this instance, I think Morgan Stanley is right. This is just one of several reasons why investors ought to sell Monsanto and by CF Industries.
A Lawsuit and Long-Running Feud
Business is going just fine for Monsanto, but news that DuPont (NYSE:DD) is suing the seed producer for infringing on two patents that allow corn seed to withstand environmental stress should be a concern to investors.
Without getting into the complexities of the case, DuPont is suggesting that a couple of people — who were responsible for the invention of a defoliation process designed to make seeds more robust — went to work with Monsanto and took with them their knowledge of the patents. Monsanto obviously is fighting these accusations. The two companies have been squabbling since 1999, when DuPont acquired Pioneer Hi-Bred.
I have no idea who is on the right side of the current legal battle, but it certainly has to be considered a big distraction for both companies. Monsanto investors might want to consider the fact that CF Industries, in the long term, has been a much better investment. It’s hard to imagine this kind of distraction suddenly resulting in Monsanto outperforming CF industries. History is not on its side.
Both companies are experiencing a rebirth of sorts. CF Industries’ third-quarter revenue increased 53%, to $1.4 billion, while earnings-per-share, excluding one-time charges, were $5.16, 34 cents higher than the consensus estimate.
Monsanto’s fourth-quarter revenue grew 15%, to $2.3 billion, while it lost $112 million, compared with a loss of $143 million a year earlier. Monsanto’s full-year revenue increased 13%, to $11.8 billion, and its profit jumped 45%, to $1.6 billion.
In its third-quarter earnings release, CF Industries commented that a strong spring 2012 corn planting, along with favorable fall weather and stable natural gas prices, provide it with a very healthy operating climate. Investors should interpret this to mean continued high-double-digit growth in both revenue and earnings. The current analyst estimate for 2011 revenue is $6.1 billion and earnings-per-share of $21.98. CF Industries should be able to easily exceed both numbers.
Over the next five years, analysts expect CF Industries to grow earnings 16.5% annually, versus 12.1% for Monsanto. With the world food supply facing constant threats, fertilizer producers seem in a sweet spot at the moment. Take advantage of this fact.
Certainly analysts believe CF Industries is the more compelling purchase at the moment. But how do the two companies stack up from a valuation perspective? One of my favorite metrics is enterprise value to EBITDA. Monsanto currently has an enterprise value that’s 12.3 times EBITDA, compared to 4.1 times for CF Industries. In terms of forward P/E, Monsanto is more than double CF Industries at 18. Even CF Industries’ EBITDA to total debt is higher.
There’s really no comparison. CF Industries is clearly much better poised for growth. On the other hand, if you are looking for a boring but predictable investment, Monsanto is probably more your cup of tea.
As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.