Monsanto Should Keep Plowing Along

by Lawrence Meyers | November 9, 2012 9:20 am

In California, there was a proposition that would require genetically modified (GM) foods to be labeled as such.

And you’d think that in a state like California — one that voted to raise taxes on itself, gave Democrats a supermajority in the government and pushed even more money to green energy — the proposition would win big.

Think again.

The proposition failed, which is surprising considering that the organic movement continues to boom — just look at the success of Whole Foods Market (NYSE:WFM[1]) and Wal-Mart‘s (NYSE:WMT[2]) increased focus on natural offerings.

So what’s the deal? Well, advertising or lobbying efforts aren’t to blame. Based on how the state and country voted, a love for organic simply doesn’t translate to disdain for GM-food.

In fact, it turns out that — despite the unfriendly regulatory environment and enormous levels of bad press directed at it — multinational agricultural biotech company Monsanto (NYSE:MON[3]) continues to thrive.

The importance of this cannot be underestimated.

While the organics industry is dedicated to spreading the message against all things non-organic, the fact that Monsanto remains a global agribusiness powerhouse shows that the people who matter — the purchasers of their products — haven’t been all-that affected.

That’s good news in the long term for Monsanto shareholders. Monsanto’s competitors, like Sygenta (NYSE:SYA[4]), along with the entire agribusiness sector and the chemical industry, can also take heart in this news.

Companies like Potash of Saskatchewan (NYSE:POT[5]) and The Mosaic Company (NYSE:MOS[6]) have seen solid earnings growth despite the regulatory and activist headwinds as well.

A recent earnings report from Monsanto may give some pause to investors, however. The company saw a 6% drop in revenue and a $229 million net loss in the last quarter. Nevertheless, the stock hasn’t moved much, demonstrating investor faith in the long-term prospects of the company.

And that faith has been well-earned. Net income for the year was still a respectable $2 billion, including the quarterly loss. Plus, the company is global giant with a great balance sheet and financials. It generated $2.4 billion of free cash flow last year and has $3.6 billion in cash against only $2 billion in debt.

The only problem is that Monsanto looks overvalued. With a 10% long-term growth rate, a 1.7% dividend and a 20% premium for balance sheet and cash flow and brand, even at a 14x multiple, fair value is $59. Monsanto trades at $86.

In the long-term, the company will keep on growing plants and profits. I just suggest waiting for a big market downdraft before entering.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned securities.

  1. WFM:
  2. WMT:
  3. MON:
  4. SYA:
  5. POT:
  6. MOS:

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