Wait for Monsanto to Slide

by Lawrence Meyers | April 9, 2012 10:02 am

I’ve written before[1] about the bullish macro view on agribusinesses such as Monsanto (NYSE:MON[2]). The company reported yet another great quarter — $2.29 in the latest quarter, which crushed estimates by 16 cents.  The company also raised guidance to about $3.50 per share. Despite this, the stock took a small hit, off about 4%. Is it time to buy?

There are many things to like about Monsanto. It’s the brand name in the agribusiness sector. It has global reach. It’s important to understand the depths of Monsanto’s business to see how widespread its product base is.

The Seeds and Genomics segment produces all kinds of fruit and vegetable seeds. But it also develops biotechnology traits that assist farmers in controlling insects and weeds and provides genetic material and biotechnology traits to other seed companies.

The Agricultural Productivity segment offers herbicides for agricultural, industrial, ornamental and turf applications. The company sells its products through distributors, independent retailers and dealers, agricultural cooperatives, plant raisers and agents as well as directly to farmers.

Competition is provided by companies such Syngenta (NYSE:SYT[3]) and BASF, so it’s not as if Monsanto has a monopoly. It also faces ongoing challenges from activists who hate the idea of synthetic seeds. The company is on solid financial footing, with some $3 billion in cash and half that in debt. It generates more than $2.5 billion in free cash flow annually.

The problem with Monsanto, however, remains its valuation. I think the company deserves a premium, but with a long-term growth rate of 12%, adding in 1.5% for the dividend, and even adding a generous 20% premium, I could maybe justify a 16x valuation. But Monsanto is trading at 23x earnings — too expensive to jump in just yet.

I’d suggest staying alert, however. A big market drop could drive the stock into the buying range.

As of this writing, Lawrence Meyers[4] did not hold a position in any of the aforementioned securities[5].

  1. written before: mailto:https://investorplace.com/2012/01/the-big-secret-monsanto-earnings-reveal-mon-stock/
  2. MON: http://studio-5.financialcontent.com/investplace/quote?Symbol=MON
  3. SYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=SYT
  4. Lawrence Meyers: mailto:pdlcapital66@gmail.com
  5. securities: https://investorplace.com/investing-in-securities/

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