Is there a more hated and misunderstood company than Monsanto (MON)? The way some people talk about GMOs, you’d think they were the cause of the zombie apocalypse.
The good news for Monsanto stock is that GMOs are only a part of a diversified business, and that for every minor setback GMOs have, there are plenty of ways MON keeps powering forward. The other tailwind is that world population continues to grow, so sustainable food production will remain a challenge.
Monsanto stock crushed estimates with EPS of $2.39 per share, well ahead of expectations of $2.07. Curiously, this came on a 6% miss on revenues, which came in at $4.58 billion. That itself was a 7.7% increase in revenues.
Overall, MON is beholden to commodity prices, since it produces solutions for corn, soybean, cotton and vegetables. If commodity prices are low, as they have been, then Monsanto stock suffers because the company receives less for its product. It also has the same currency effects other global companies have dealt with this year.
Monsanto Stock: The Ups and Downs
Because corn is a big part of agriculture and food consumption, it accounts for half of MON’s Seeds and Genomics segment. Revenues rose about 16% in the segment for the quarter, although the segment’s sales are still down about 7% YTD. Gross profit for the corn seed and traits segment is up about 26% to $947 million.
Soybeans are also performing modestly well, with Q3 revenue up 2.3% year-over-year, and 11% YTD. Gross profit has increased 6% to $528 million in the quarter.
All the other segments declined between 6% and 10%, leaving the entire segment with a 5% quarterly sales increase, and a 4% YTD decline. Still, the segment’s quarterly gross profit increased 11% to $2.06 billion.
The other segment, Agricultural Productivity, grew 14% in the quarter, but remains down 5% YTD. Year-over-year gross profit is stronger in this higher-margin segment, up 43% to $681 million.
Despite an increase in SG&A, Monsanto stock basically killed it in the quarter, with fine net income rising from $858 million to $1.15 billion. However, the YTD sales declines has hit the bottom line, so that even the hefty $2.82 billion in net income is down from last year’s $2.92 billion.
EBIT remains robust, though, rising from $1.2 billion to $1.6 billion in the quarter, and $4.08 billion YTD. The balance sheet shows $1.2 billion in cash and $8.4 billion in debt.
Monsanto stock is thus a bit of a roller-coaster, because it is so tied to those nasty commodity prices. What offsets the inconsistent quarter to quarter results is the cash flow. It’s outstanding. It’s also necessary because MON management says next quarter is going to be flat.
That’s why I think it’s difficult to value Monsanto stock on a traditional P/E basis. We can look at it, with its estimated earnings of $5.80 per share, its $107 price tag, and see its 18x earnings valuation. We can also say that EPS is only growing 10% this year, and much of that is likely due to share buybacks.
Yet the commodity and currency impacts, and other variables, suggests it would be short-sighted to play that game. I think you have to look at the EV-to-EBITDA ratio. In this case, it’s 13.78, a bit cheaper than the rival it seeks to acquire, Sygenta AG (SYT), which is at 14.48. It’s also a world-class company with great cash flow.
I think if you considering Monsanto stock, you are buying into its global dominance.
Lawrence Meyers does not hold shares of any company mentioned.
