March 9, 2010
MONSANTO COMPANY
Fisher College of Business
(NYSE: MON)
Buy Recommendation
Investment Thesis:
Monsanto Company (the “Company”) is the premier
provider of agricultural products to farmers around the
globe. Monsanto operates in two primary segments:
Seeds and Genomics, and Agricultural Productivity.
Through these segments, the Company offers state-ofthe-art solutions for its customers in the agricultural
space.
The Company leverages groundbreaking
proprietary and acquired biotechnology to offer
solutions that include seeds, biological trait products,
and chemical herbicides. Though management has
identified it a “transition year,” 2010 nonetheless stands
to be an exciting year for the Company, as it makes the
industry’s two most significant (by acreage) new
product launches: Genuity Roundup Read 2 Yield
soybean seed and Genuity SmartStax corn seed. Other
catalysts for growth in the near term will come from
R&D leverage as well as operating leverage associated
with the restructuring of the chemical business. Longterm growth potential will come from approvals within
the Company’s fertile R&D pipeline as well as growth
in global markets. With respect to quantitative analysis,
based on management’s guidance and my own
calculations, I believe Monsanto will outperform its
peers in the upcoming twelve month period with a
target price of $90 and upside potential of 24%.
Analyst: Ryan A. Mayes
Mayes.22@osu.edu
440 552 7856
Ohio State University SIM Fund
Fund Manager: Chris Henneforth, CFA
Royce West, CFA
Rating:
BUY
Price (as of Mar-04-2010):
$72.50
Price Target:
$90.00
% Upside:
24.1%
NYSE Ticker:
MON
Sector:
Basic Materials
Industry:
Ag. Products
Market Data
52-Week Range:
$66.57-$93.35
Total Entprs. Value (MM):
$39,622.5
Market Cap. (MM):
$39,516.9
Institutional Ownership:
83.0%
F.D. Shares Out. (MM)
545.06
Avg. Daily Volume:
5,834,903
Financial Summary
EV/EBITDA
12.5x
Book Value (MM):
$10,286.0
Book Value/Share:
$18.87
Share Price Performance
Net Debt (MM):
$160
LTM Return on Equity:
19.2%
$140
Long-Term Debt (MM):
$1,724.0
$120
Dividend Yield:
$100
USD (MM)
2008A
2009A
2010E
2011E
$80
Revenue
$11,517
$11,724
$11,372
$12,964
$60
EV/Revenue
3.4x
3.4x
3.5x
3.1x
$3.69
$4.50
$3.18
$4.59
---
$4.41
$3.27
$4.40
$1,534.0
1.4%
EPS
$40
FY Aug
$20
Consensus
$0
Page 1 of 28
MON
S&P 500 (Indexed)
Table of Contents
Investment Thesis…………………………………………………………………………1
Company Overview……………………………………………………………………….3
Business Overview……………………………………………………………………......4
Seeds and Genomics………………………………………………………………4
Agricultural Productivity………………………………………………………….7
Industry Analysis………………………………………………………………………….8
Growth of Industry………………………………………………………………..8
Seeds and Genomics……………………………………………………………..10
Agricultural Productivity………………………………………………………...11
Macroeconomic Analysis………………………………………………………………...12
Demographic Trends……………………………………………………………..12
Increasing Adoption of Crop Biotech……………………………………………13
Commodity Prices………………………………………………………………..13
Company Analysis……………………………………………………………………….14
Competitive Advantages…………………………………………………………14
Equity Valuation: Multiples……………………………………………………...15
Equity Valuation: Discounted Cash Flows………………………………………19
Summary…………………………………………………………………………………20
Opportunities…………………………………………………………………….20
Risk Considerations……………………………………………………………...21
Conclusion……………………………………………………………………….21
Appendix 1: Monsanto Financial Statements from Company 10-K…………………….23
Appendix 2: Discounted Cash Flow Model……………………………………………...26
Appendix 3: Pipeline from Company Investor Toolkit………………………………….27
Appendix 4: Earnings Seasonality from FY 2010 Q1 Conference Call…………………28
Page 2 of 28
COMPANY OVERVIEW
Founded in 1901 in St. Louis, Missouri, Monsanto has served as a pioneer in the
agricultural chemicals industry for over a century. Monsanto’s seeds, biotechnology trait
products, and herbicides provide farmers with solutions that improve productivity, reduce
farming costs, and produce better food for consumers and feed for animals.1 During the
course of its history, Monsanto has established a world-class reputation for innovation
and reliability.
Monsanto operates in two primary segments: Seeds and Genomics, and Agricultural
Productivity. Within these segments, the Company leverages groundbreaking proprietary
and acquired biotechnology to offer solutions for farmers that include seeds, biological
trait products, and chemical herbicides.
Within its Seeds and Genomics division, the Company produces premium seed brands for
large-acre crops such as corn, cotton, and soybeans, in addition to small-acre crops like
vegetables. 2 Monsanto applies its vast portfolio of intellectual property in genetic
technology—including biotechnology, breeding, and genomics—to design and
manufacture seeds bred with synthetic traits that allow for superior crop yields and
weather protection. The Company currently enjoys a global market share of roughly 90%
of total acreage planted with such biotechnological traits. In the 2009 fiscal year, the
Seeds and Genomics segment represented 62% of total revenue, and is regarded as the
primary driver for long-term growth.
Operating in its Agricultural Productivity division, the Company offers crop protection
products for commercial use and residential lawn-and-garden herbicide products, such as
Roundup. 2 The division constituted 38% of total revenue in the 2009 fiscal year.
For information regarding revenue composition by segment and geographic region,
please see Figures 1 and 2.
Monsanto operates internationally, with slightly under half of its revenue generated from
markets outside the United States. Investing approximately 9-10% of revenue in
research-and-development (R&D), Monsanto remains committed to accelerating its
competitive advantage in innovation. The Company concentrates the vast majority of its
R&D efforts on new biotech traits, elite germplasm, breeding, new variety and hybrid
development, and genomics research.2 Still headquartered in St. Louis, Missouri, the
Company continues today to be the pioneer in an industry it effectively created.
1
2
Monsanto Company 2009 10-K.
http://www.monsanto.com/investors/corporate_profile.asp.
Page 3 of 28
Figure 1 and 2
2009 Fiscal Year Sales by
Geographic Region
2009 Fiscal Year Sales by Business
Segment
5%
15%
38%
62%
Seeds & Genomics
22%
Ag. Productivity
59%
North America
Europe-Africa
Latin America
Asia-Pacific
BUSINESS OVERVIEW
Merely an “infant,” the agricultural chemicals industry is growing at a rapid pace. As
described, Monsanto considers its initiatives as two complimentary, yet separate
businesses: Seeds and Genomics, and Agricultural Productivity. In order to better
understand the myriad business attributes and the competitive dynamics unique to each
segment, we will discuss the two separately.
SEEDS AND GENOMICS SEGMENT
Within this segment, Monsanto produces a variety of its own in-house brands of seeds
that contain biotechnological traits that protect crops against insects and weeds. In
addition, the Company participates in revenue-generating licensing engagements with
other seed manufacturers for exchange of its own proprietary genetics portfolio. Figure
3 provides a description of the two primary products and associated brands of the
segment.
Figure 3
Major Products Applications
Germplasm
Row crop seeds:
Corn hybrid and foundation seed
Soybean varieties and foundation seed
Other row crop varieties and hybrids, such as canola
Vegetable seeds:
Open field and protected-culture seed for tomato,
pepper, eggplant, melon, cucumber, pumpkin, squash,
beans, broccoli, onions, and lettuce, among others
Biotechnology
Enable crops to protect themselves from borers and
traits
rootworm in corn and leaf- and boll-feeding worms in
cotton, reducing the need for application of
insecticides
Enable crops, such as corn, soybeans, cotton, and canola
to be tolerant of Roundup and other glyphosate-based
herbicides
Major Brands
DEKALB , Channel Bio for corn
Asgrow for soybeans
Deltapine for cotton
Seminis and De Ruiter for vegetable seeds
SmartStax , YieldGard , and YieldGard VT for corn;
Bollgard and Bollgard II for cotton
Roundup Ready and Roundup Ready 2 Yield
(soybeans only)
Genuity, global brand for multiple products
Source: Monsanto Company 2009 10-K
Page 4 of 28
As described previously, management has identified the Seeds and Genomics Segment as
the primary vehicle for long-term growth. It is evident, too, that the segment will serve
as a pivotal catalyst for growth in the near-term as well. Consider the Company’s latest
second-generation biotechnology product, Roundup Ready 2 Yield, which made its
limited launch just months ago. Roundup Ready 2 Yield is an extension of the original
Roundup Ready—a biotechnological trait resistant to glyphosates, or herbicides such as
the Company’s own Roundup. When synthesized with a soybean germplasm (i.e.,
Asgrow), the result is a seed that has the ability to grow a crop immune to “weed killer”
formulas. Farmers may then use herbicide in a post-emergence scenario without the dire
effect of diminished yields.
The benefits of Roundup Ready 2 Yield are substantial. According to four years of field
trials across six U.S. states, soybean yields are between 7-11% greater when using the
new trait versus the original Roundup Ready product, which was successful in its own
right.3 According to an independent compilation of data done by the Ontario Oil and
Protein Seed Crops Committee (OOPSCC), “Soybean lines containing [Roundup Ready 2
Yield] out-yielded existing commercial varieties containing the original Roundup
Ready(R) technology by 11.2%.”4 Also intriguing, the OOPSCC has supported a large
number of registrations of Roundup Ready 2 Yield, while it had supported only a few
registrations of the original Roundup.
For Monsanto, the implications of materially positive yields are vast. As a new and
improved biotechnological product hits the agricultural market, it in effect makes all
related predecessor products irrelevant. The farmer’s saleable product, after all, is a
bushel of corn, soybeans, wheat, etc. That is, the farmer produces an undifferentiable
commodity. Rising yields suggests increasing output with respect to inputs. When
enough farmers utilize the technology to create a measurable increase in the aggregate
crop supply, downward pressure on prices ensues. The only farmers hurt by this dynamic
are the ones who have not yet adopted the technology; early adopters offset the falling
prices by leveraging volume and curtailing consumption of energy, herbicides, and
insecticides. Of course, farmers understand the economics underlying these principles,
however, and in most instances proactively adopt improved technologies.
Though Roundup Ready 2 Yield made its initial launch in 2009, the current year is
expected to facilitate a much higher degree of penetration. Please see Figure 4 for details
on three-year penetration.
This year Monsanto is also making broad acreage introduction with the highly anticipated
SmartStax, the Company’s newest insect-protection and weed control platform for corn.
The application of SmartStax reduces the refuge5 requirement from 20% to merely 5% in
3
http://www.monsanto.com/rr2y/.
http://www.benzinga.com/pressreleases/m138353/ontario-oil-and-protein-seed-crops-committee-datasends-clear-message-genuity.
5
“[Federally-mandated] refuge acres ensure that rare resistant insects that feed on insect-protected varieties
of corn will mate with susceptible insects and slow the development of resistance. Loss of the technology
to resistance could cost U.S. farmers billions of dollars through yield reduction and increased pesticide use.”
http://www.ncga.com/.
4
Page 5 of 28
the U.S. Corn Belt and 50% to 20% in the U.S. Cotton Belt.6 This reduction carries
substantial implications for farmers, who inherit superior protection from insect damage
and achieve greater overall yields by 5-15%. With a record eight-trait composition,
SmartStax is expected to drive top-line growth over the next three years, capitalizing on
the 86 million acre domestic market for corn.
Figure 4: SmartStax and Roundup Ready 2 Yield Acre Penetration7 (as of Jan-06)
~39M
40M
~34M
30M
~17M
20M
~9M
10M
~4M
~2M
0M
2009
2010
Sma rtSta x
2011
2012
Roundup Ready 2 Yield
Source: Monsanto Company FY 2010 Q1 conference call presentation
The Company provided acre penetration guidance illustrated above during its 2010 first
quarter conference call on January 6, 2010. Since then, management indicated at the
Goldman Sachs Annual Biotech Forum that 2010 acreage targets may fall short by
approximately 20%, yet 2012 targets remain on track.8 Figure 5 illustrates my estimates
for 2010 and 2011 acreage penetration.
Figure 5: SmartStax and Roundup Ready 2 Yield Acre Penetration (as of Mar-09)
~39M
40M
~34M
30M
20M
~15.3M
10M
~1.5M
~7.2M
~3.2M
0M
2009
2010
SmartStax
2011
2012
Roundup Ready 2 Yield
6
www.thefarmerstockman.com.
Monsanto Company FY 2010 Q1 conference call presentation.
8
http://www.bloomberg.com/apps/news?pid=20601103&sid=aDnXztodBrDo.
7
Page 6 of 28
Though the projected 20% shortfall for penetration in 2010 is a disappointment, it ought
to not materially affect the highly anticipated success of both products. With respect to
the SmartStax shortfall, CFO Carl Casale provided9 two explanations that may offer some
rationalization: i) limited availability of hybrids, and ii) competition stemming from price
reduction and strong performance of SmartStax’s predecessor (and now, competition) —a
triple stack platform. By FY 2011, the Company will make available a minimum of six
hybrids, effectively solving the first issue.10 With respect to competition from the triple
stack alternative, I believe farmers will not only be motivated by the relative yield benefit
of SmartStax, but also the meaningful reduction in refuge acres.
Also explaining slow adoption may be due to Roundup Ready 2 Yield and SmartStax
representing approximate price premiums of 40% and 17%, respectively.11 Corn and Soy
prices are down approximately 8% and 10%, respectively, on a year-to-date basis. These
commodities will be discussed later; for now, it is relevant to note that declining prices
may well be playing a role in the penetration shortfall. Farmers’ earnings are strongly
correlated to the prices of the commodities they sell; as these prices face downward
pressure, farmers presumably have fewer dollars to invest in new platforms.
AGRICULTURAL PRODUCTIVITY
Within this segment, Monsanto markets its Roundup brand of herbicides for both
commercial and residential use.
Figure 6
Major Products
Glysophate-based
herbicides
Selective herbicides
Lawn-and-garden
herbicides
Applications
Non-selective agricultural, industrial, ornamental and turf applications for weed
control
Control of preemergent annual grass and small seeded broadleaf weeds in corn and
other crops
Residential lawn-and-garden applications for weed contol
Major Brands
Roundup
Harness for
corn and cotton
Roundup
Source: Monsanto Company 2009 10-K
Monsanto’s most popular “household name” brand Roundup is a non-selective 12
herbicide that has been commercially available since the 1970s. Along with other
glyphosates, Roundup comprises roughly 80% of total sales within the Agricultural
Productivity segment. In June 2009, management announced its intentions to pursue a
restructuring initiative with respect to its glysophate business; implications of this
announcement will be discussed in the Industry Analysis section.
9
Annual R&D Pipeline Review in New York, 12-Jan-2010.
Farmers subscribe to the notion of seed diversification as a way of mitigating risks. With additional
hybrids available, farmers are more compelled to make a larger investment in the switch.
11
JPMorgan estimate.
12
Non-selective herbicides combat all weeds without discrimination; selective herbicides combat only
specific weeds.
10
Page 7 of 28
Industry Analysis
GROWTH OF INDUSTRY
Since Monsanto marketed the first commercially-available biotech trait-enhanced product
in 1996, the industry has grown at an exuberant pace—a 12-year CAGR of 43% (Figure
7). The economic and environmental incentives have accelerated the adoption of
genetically modified (GM) crops on a global scale (Figure 8). Farmers represent one of
the most vocal cohorts advocating in favor of biotech in the midst of regulatory scrutiny.
In recent years, however, the domestic regulatory attitude has become decidedly
favorable towards the industry as benefits have become increasingly clear. To that end,
the U.S. represents 64% of all genetically modified crop production occurring worldwide.
Figure 7: Global value of biotech seed market (billions of dollars)
$8.0
$7.5
$6.9
$7.0
$6.2
$6.0
$5.2
$4.7
$5.0
$4.2
$3.7
$4.0
$3.2
$2.7 $2.7
$3.0
$2.0
$2.0
$1.0
$0.8
$0.1
$0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: ISAAA Brief 39
Figure 8: Global area of biotech crops (millions of acres)
350
309
282
300
252
250
222
200
200
167
130
150
99
100
145
109
70
50
28
4
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: ISAAA Brief 39
Page 8 of 28
Internationally, adoption of genetically modified crops has varied. Developing nations,
historically characterized by relatively lax regulation, have thus led adoption of the GM
market after the United States; Brazil and Argentina constitute 21.4% and 21.3% of
global biotech crop area, respectively. 13 The European Union, meanwhile, has been
slower to advocate GM adoption. In the EU, much of the opposition has resulted from
social and political pressures.
The attitude, however, seems to be changing rather briskly with the appointment of Mr.
John Dalli as EU Health and Consumer Policy Commissioner. As recently as Tuesday,
March 2, 2010, the EU approved the cultivation of Amflora, a genetically modified
potato engineered by Monsanto’s German partner company, BASF AG (BASF), as well
as the use of three types of altered maize in food and feed production, saying they do not
pose health risks.14 Significantly, the motion represents the first EU approval of a biotech
crop in over a decade. For BASF, the approval comes after initiating the regulatory
process more than thirteen years ago;15 the move is also a notable victory for Monsanto,
as it shares close ties with the German chemical maker. “The decision signals more EU
readiness to dismantle obstacles that companies ranging from Germany’s BASF to U.S.based Monsanto Co. have faced in seeking to expand the $10.5 billion global biotech
crop market through growth in Europe.”14
Today, 25 countries are involved in growing genetically modified crops (Figure 9).
Besides the socioeconomic incentives obtained through yield enhancement, today
companies like Monsanto prepare to broaden the scope by developing products that
deliver tangible health benefits to end-consumers. For information regarding yield
growth, please refer to the Economic Analysis section.
Figure 9: Global adoption of biotech crops by nation, 2009
Rank
Country
Biote ch crops
(million hectares)
Soyabean, maize, cotton, canola,
64.0 %
squash, papaya, alfalfa, sugarbeet
21.4
Soyabean, maize, cotton
21.3
Soyabean, maize, cotton
8.4
Cotton
Are a
1
USA
2
3
4
Brazil
Argentina
India
5
Canada
8.2
6
China
3.7
7
8
9
10
11
12
13
Paraguay
South Africa
Uruguay
Bolivia
The Philippines
Australia
Burkina Faso
2.2
2.1
0.8
0.8
0.5
0.2
0.1
Rank
Country
Biote ch crops
(million hectares)
Are a
14
Spain
15
Mexico
<0.1
0.1
Cotton, soyabean
Maize
16
Chile
<0.1
Maize, soyabean, canola
Canola, maize, soyabean, sugarbeet
17
Colombia
<0.1
Cotton
Cotton, tomato, poplar, papaya,
sweet pepper
Soyabean
Maize, soyabean, cotton
Soyabean, maize
Soyabean
Maize
Cotton, canola
Cotton
18
Honduras
<0.1
Maize
19
20
21
22
23
24
25
Czech Republic
Portugal
Romania
Poland
Costa Rica
Egypt
Slovakia
<0.1
<0.1
<0.1
<0.1
<0.1
<0.1
<0.1
Maize
Maize
Maize
Maize
Cotton, soyabean
Maize
Maize
Source: Clive James, 2009
13
http://www.worldwatch.org/.
http://www.businessweek.com/news/2010-03-02/basf-gene-altered-amflora-potato-approved-forcultivation-in-eu.html.
15
http://www.agro.basf.com/agr/AP-Internet/en/content/news_room/news/basf-european-commissionapproves-amflora-starch-potato.
14
Page 9 of 28
SEEDS AND GENOMICS
In many ways, this segment of the agricultural chemical industry is very much akin to the
biopharmaceutical industry. Firms are universally accustomed to making substantial
investments in R&D (typically 10-20% of revenue). As these investments fundamentally
represent the pursuit of cutting-edge innovation, they are characterized by high
uncertainty, low rates of success, and long payback periods. According to Monsanto’s
own estimates, tens of thousands of candidates are screened and tested for every project
that makes its way through all necessary phases, eventually reaching the market.16 For a
complete table on the R&D timeline from discovery phase to commercialization, please
refer to Appendix 3. Investment in biotech R&D is highly incentivized by intellectual
property rights, which allow for temporary monopoly incentives. To that extent,
successful discovery, regulatory approval, and commercialization is enormously
profitable.
Critical to the long-term success of Monsanto will be its record strong pipeline. Due to
the high degree of uncertainty due to technology and regulation, it remains essential to
pursue multiple streams of potential success, ideally with variable maturities.
Importantly, Monsanto cultivates its pipeline by leveraging both in-house R&D
initiatives and technology acquired through M&A activity. In 2009, the Company
purchased Aly Participacoes Ltda. (Aly), a Brazilian parent of two sugarcane breeding
and technology companies. Besides bolstering a historically low-focus segment, the
Company’s acquisition represents a tactful move to ramp up penetration in the Latin
American markets. Aly will prove to be an invaluable asset to the extent that demand for
sugarcane will benefit from increasing global food and energy needs. Also in 2009,
Monsanto acquired WestBred, LLC, a Montana-based company specializing in wheat
germplasm.17
Competition
Monsanto’s primary rivals are DuPont Pioneer18 and Syngenta. Over the past few years,
both companies have invested millions of dollars in their own seeds and traits businesses.
Additionally, management expects further competition to develop from small firms over
the next couple of years. Despite encroaching competitive pressures, the Company is
well-positioned to resist the headwind and, in select instances, actually benefit from the
shift. As indicated earlier, Monsanto benefits from a substantial revenue stream
stemming from the licensing of its proprietary germplasm and biotech platforms. Many
(if not most) of the Company’s 250+ licensees are, in fact, competitors as well. To that
extent, as the number of suppliers in the seeds market swells, many of the unfavorable
implications associated with increased competition in Monsanto’s germplasm business
will be offset by the increased licensing potential within its traits unit. Additionally,
Monsanto has a history of leveraging competition for co-developmental purposes.
SmartStax, for instance, represents the collaboration with Dow AgroSciences. Separately,
Monsanto has entered into agreements with BASF (maker of EU-approved Amflora) and
16
www.monsanto.com.
Monsanto Company 2009 10-K.
18
As of May-5-2009, the Company filed a lawsuit against E.I. du Pont de Nemours and Company, parents
company of DuPont Pioneer, for violation of licensing agreements.
17
Page 10 of 28
Bayer CropScience, thus synthesizing joint pipelines for extensive research initiatives, as
well as joint efforts to push for regulatory momentum. Though enhanced rivalry
certainly serves as a relevant consideration for the industry outlook in the next few years,
Monsanto’s industry-leading market share, robust IP portfolio, and powerful R&D engine
stand to mitigate this concern.
AGRICULTURAL PRODUCTIVITY
While the crop biotech industry thrives off innovation based on successful R&D
initiatives, success in the agrichemical industry of late is characterized by cheap sourcing
and economics of scale. If crop biotech is analogous to the biopharmaceutical industry,
as suggested above, then the agrichemical segment is very close to the traditional
chemical industry.
Competition
FY 2009 proved to be a difficult year for Monsanto’s Roundup business, as the Company
saw gross profits suddenly plummet nearly 50% due to emerging competition from
Chinese generic manufacturers. In the midst of weak global demand for glysophates,
increased supplies overwhelmed the market, applying significant downward pressure on
prices. Instead of cutting prices to compete with the generics, Monsanto held its ground
and absorbed the impact via falling volumes. Segment sales fell $569 million from FY
2008 to FY 2009.
With no patent protection and few competitive advantages in the glysophate business
beyond the strong Roundup brand name, it appears that Monsanto’s marquee herbicide
business has reached maturity. Dozens of China-based glysophate manufactures entered
the market in 2009; data, however, shows that a handful have since either cut back or
ceased operations entirely given the supply and demand mismatch.
Segment Restructuring
In response to the changing industry, management announced in June 2009 a new
restructuring initiative that will reposition the Roundup business so as to reduce costs
amid an increased market supply. In a clear shift away from the high-growth strategy
employed during the past five years, management’s new agenda focuses on controlling
costs and achieving a sustainable stream of cash flows.
The following summarizes the restructuring plan as outlined in the 2009 fiscal year 10-K
filing:
i)
ii)
Roll out a new division to house the Roundup brand as well as other
glysophate brands; this action will allow the company to better allocate
spending and working capital requirements.
Lower fixed and variable costs by engaging in appropriate work force
reductions and facility closures.19
19
Simultaneous to said facility closures, the Company has also invested $196 million in a new
manufacturing facility in Lulin, LA.
Page 11 of 28
iii)
Target select product and brand rationalization within the Vegetable
business.
Total charges associated with the restructuring plan are $350-400 million. Management
anticipates achieving in 2011 annual cost savings between $220-250 million in Cost of
Goods Sold and SG&A, with one-third of the savings realized in 2010. SG&A as a
percentage of revenue will decline from 20% in 2008 to 17% by 2012, offering operating
leverage and relieving additional cash flows.
Management’s actions seem to embody the most fiscally responsible strategy given the
sudden changes the glysophate industry has undergone recently. Besides managing
overhead and reducing variable manufacturing costs, the restructuring plan emphasizes
Monsanto’s focus on its Seeds and Genomics Segment—the Company’s most valuable
asset and driver for growth (see note below).20
Macroeconomic Analysis
DEMOGRAPHIC TRENDS
The underlying macroeconomic driver that will propel significant growth in the
agricultural chemical industry is as follows: over the next several years, a growing
population and rising per capita income will create huge increases in demand for
agricultural goods, while the total area of arable land will grow insignificantly. Food
economists estimate that global acreage of arable land will rise merely 0.3% per annum
over the next decade; meanwhile, industry experts anticipate agricultural output will need
to double over the next few decades in order to adequately meet the needs of a growing
population.21 The only possible way to achieve a greater output of agricultural goods
while holding inputs relatively constant is to invest in higher yields. As the industry
pioneer and market share leader, Monsanto is uniquely positioned to profit from these
robust macroeconomic drivers, and continue to lead a growing industry over the next
several years.
Figure 10: Global Population Growth by 2050
10.0
9.0
8.1
8.0
6.8
6.0
4.2
4.0
2.5
2.0
0.0
1950
1980
2009
2025
2050
Source: www.thehandsthatfeedus.org
Note:
As a personal note, I would not be surprised if the Company divested its Roundup business either in
part or whole within the near future.
21
Deutsche Bank.
Page 12 of 28
“From 1948 to 2004, U.S. agricultural production nearly tripled while land in agriculture
fell by 25%.”22 Figures 11 and 12 illustrate how a significant portion of these yield gains
was captured during the past two decades due to Monsanto’s ability to deliver innovation
to farmers in the form of glysophate solutions and biotech crop technology. As the
Company completes second and third-generation trait products, these platforms will
continue to deliver yield enhancement properties to farmers globally. Significant firstgeneration products such as drought resistant traits will especially benefit crop yields in
developing countries.
Figure 11 and 12: Corn and Soybean Yield Growth (bushels/acre), 1979 – 2009
Source: USDA
INCREASING ADOPTION OF CROP BIOTECH
A more short-term macroeconomic driver for industry growth will come from the
growing number of countries moving in favor of genetically modified agriculture. As
described earlier, the EU’s move last week allows for the cultivation of GM potatoes is
an enormously significant victory for Monsanto. To the extent that the motion breaks a
ten-year moratorium against GM products, it is a relevant precedent that will strengthen
the probability of follow-on approvals in the European Union
Another recent development comes from the United States’ own Agriculture Department.
Agriculture Secretary Mr. Tom Vilsack spoke Friday, March 5, 2010 at an agriculturalcommodity convention in Anaheim, California. Mr. Vilsack communicated his
dedication on promoting U.S. crop biotechnology in the near term. Agriculture
constitutes “one of the few U.S. sectors to generate a significant trade surplus, which was
$23.2 billion during the year that ended September 30, 2009. More than a quarter of farm
revenues are directly tied to exports.” 23 The additional $54 million Mr. Vilsack is
seeking for his 2011 fiscal budget will be geared towards promoting ag exports,
particularly in China and India. Monsanto stands to benefit from pro-crop biotech policy,
especially due to its stronghold on domestic market share.
COMMODITY PRICES
Over the next few years, I think we can expect upward pressure on commodity prices.
Interests rates over the past few years have remained near historical lows while the
22
23
www.thehandsthatfeedus.org.
http://online.wsj.com/article/SB10001424052748703502804575102150581315056.html.
Page 13 of 28
Federal Reserve and other world monetary authorities have taken extraordinary measures
to provide liquidity in the midst of an infamous recession. As banks around the world
slowly begin to facilitate additional lending, the excess of liquidity will in all likelihood
have some bearing on inflationary expectations. While the Fed presumably will counter
such pressures by raising interest rates, expectations of a devaluing dollar should cause
commodity prices to react in an upward trajectory. Farmers serve as the direct recipients
of increasing prices for the crops they sell; as their own top-line grows, so too will the
top-lines of agrichemical companies like Monsanto that provide raw inputs.
Figure 13: Price of Corn and Soybeans, Oct-05 – Mar-10
350%
300%
250%
200%
150%
100%
50%
0%
Oct-05
May-06 Nov-06
Jun-07
Price of Corn
Dec-07
Jul-08
Jan-09
Aug-09
Mar-10
Price of Soybeans
Company Analysis
COMPETITIVE ADVANTAGES
In the midst of rising competition, the presence of competitive advantages becomes
essential, and the benefits thereof are vast. As considered the industry leader, Monsanto
is well-positioned to leverage its copious resources to compete with encroaching rivalry.
Though a $40 billion market capitalization would suggest otherwise, Monsanto maintains
its ability to stay nimble in the midst of an evolving industry landscape. The following
illustrates some competitive advantages that characterize Monsanto.
24
Plant breeding is the process of combining two specific plants to synthesize a
new “offspring” plant.24 According to Monsanto, plant breeding constitutes an
“intellectual numbers game.” That is, germplasm initiatives require scale, speed,
size, and quality of data. Availability to a massive pool of data is necessary in
order to identify viable leads and make advancements. To that extent, plant
breeding is largely a matter of “trial and error.” As the leader by market share,
Monsanto has the size and scale to experiment in a variety of breeding genres
Monsanto Company website.
Page 14 of 28
simultaneously, and continuously revitalize its R&D pipeline. With a best-inclass information technology system, Monsanto can rapidly process tens of
millions of data points and capitalize on opportunities before competition can
even identify them. In this fashion, Monsanto continuously realizes first-mover
benefits in an industry that rewards high speed-to-market. As competition
emerges over the next few years, these companies will be positioned to offer, at
best, first-generation traits. Monsanto, meanwhile, will be delivering second and
third-generation upgrades to its customers, securing further market share and
margin expansion.
Strategic partnering allows Monsanto to exchange information amongst
counterparties such as BASF and Bayer CropScience. In the Company’s
collaboration with Dow AgroSciences, the eight-trait SmartStax product was
developed. These partnerships allow Monsanto (and involved counterparties) to
manage R&D initiatives most efficiently and realize economies of scope in
combining proprietary research. As the largest player in the crop biotech space,
Monsanto benefits from substantial bargaining power in these relationships,
which I suspect will continue to be an economical and viable alternative to
outright acquisitions.
Distribution serves as a significant competitive advantage. “Monsanto brands
and licenses technology and genetic material to others for sale under their own
brands. Through distributors, independent retailers and dealers, agricultural
cooperatives, plant raisers, and agents, Monsanto markets its own DELKALB,
Asgrow, and Deltapine branded germplasm to famers in every agricultural region
in the world.”25 Specifically, I believe that Monsanto’s extensive collection of
licensing agreements with over 250 counterparties is an asset inimitable in whole
by competition. Separately, the Company has applied innovated solutions to
penetrating specific developing markets. In Brazil and Paraguay, for instance, the
Company coordinates a point-of-delivery, grain-based payment system that
allows Monsanto to receive compensation for germplasm sales that would
otherwise be infeasible given the circumstances faced by local farmers.
EQUITY VALUATION: MULTIPLES
In determining a fair valuation of Monsanto, I analyzed various trading multiples over a
five-year horizon. For the sake of a holistic approach, I considered three separate
multiples-based valuation methodologies: absolute multiples, relative multiples (with
respect to the S&P 500), and relative multiples (with respect to an index of comparable
companies).
Absolute Valuation
Monsanto currently trades below each of the multiples considered below on an absolute
basis. For EV/EBITDA, Price/Forward Earnings, and Price/Sales multiples, I used a cash
flow model I built to determine target multiples and per share metric values (i.e, EPS).
The target multiples implied by my model are generally in line with the five-year
medians. In the case of EV/EBITDA, the model’s implied multiple is nearly a half-turn
25
Monsanto Company FY 2009 10-K.
Page 15 of 28
more conservative than the historical median of 16.4x, suggesting that my model is more
conservative than the past five-year trend.
For Price/Book, I assumed a reversion to the median; this metric, however, perhaps ought
not to be considered as meaningful as the rest since much of the value of Monsanto’s
balance sheet derives from hard-to-value intangibles contained in its substantial
intellectual property portfolio.
When considering all four multiples simultaneously, the median overall target share price
is $90.08.
Figure 14: Monsanto Absolute Valuation
High
Low
Median
Current
Target
Multiple
EV/EBITDA
20.9x
12.3x
16.4x
12.3x
16.0x
P/Forward E
43.2
15.4
26.1
21.3
28.4
3.18
90.25
P/Sales
7.1
2.5
3.7
3.7
4.3
20.86
89.72
P/B
7.6
2.9
4.2
3.9
4.2
21.50
90.30
Targe t Me tric
/ Share
Targe t Price
$5.82
$93.05
Relative Valuation: S&P 500
On a basis relative to the S&P 500, Monsanto currently trades below the five-year
median ratios of EV/EBITDA and Price/Forward Earnings multiples. I backed out an
“implied” target price by applying the “Percent from Median” measure with the current
share price of $72.50.
With respect to Price/Sales, Monsanto historically trades at a multiple of 3.0x that of the
broad index; the Company is currently trading in-line with this long-term trend,
suggesting fair value. While offering another data point, Price/Sales multiples are by no
means the ultimate authority with regards to valuation matters due to their myopic scope.
Because the metric exclusively considers top-line performance, it implicitly ignores many
important elements critical to our analysis. Operating leverage obtained through margin
expansion and declining R&D as a percentage of revenue, for instance, serve as two
catalysts for material bottom-line growth for Monsanto. To the extent that investors
ought to pay a premium for enhanced future earnings potential, a Price/Revenue multiple
based on historical performance may not suffice as a trustworthy indicator. Nonetheless,
I include the multiple to serve as a “downside” case with respect to management’s
strategic plan. Overall, the median target share price based on these metrics is $88.03.
Figure 15: Monsanto Relative Valuation: S&P 500
High
Low
Me dian
Curre nt
Pe rce nt from
Me dian
Curre nt
Valuation
Implie d
Target Price
EV/EBITDA
7.0x
1.6x
2.9x
1.8x
-36.7%
Undervalued
$116.36
P/Forward E
3.0
1.1
1.7
1.4
-17.6%
Undervalued
$88.03
P/Sales
5.4
1.7
3.0
3.0
0.0%
Fairly-valued
$72.50
Page 16 of 28
Relative Valuation: Comparable Company Analysis
For this analysis, I gathered the quantitative performance metrics of five comparable
companies identified by Monsanto in the fiscal 2009 10-K. These companies include:
BASF SE
Bayer AG
The Dow Chemical Company
EI DuPont de Nemours & Co.,
Syngenta AG
While all five companies serve as competitors of Monsanto (DuPont and Syngenta being
the primary rivals), only Syngenta offers a “pure-play” comp. BASF, for instance,
engages in businesses outside of crop biotech; it runs a large traditional chemicals and
plastics segment. DuPont is especially diverse; it is a holding company for businesses
ranging from electronics to pharmaceuticals; its agriculture division Pioneer is merely
one of the company’s many segments. These non-agricultural biotech segments are
generally associated with, among other things, lower margins and relatively modest
growth potential.
Figure 16: Monsanto Comparable Company Analysis: Performance Metrics
($ in millions, except per share data)
Price
Equity
Enterprise
Ticker
03/08/10
Value
Value
Monsanto Co.
MON
$72.50
$39,561.4
$41,152.4
$2,005.0
0.6x
The Dow Chemical Company
DOW
30.00
34,508.8
58,604.8
22,373.0
5.0x
39.3%
44,875.0
EI DuPont de Nemours & Co.
DD
34.97
31,607.2
37,177.2
11,034.0
2.6x
25.9%
27,293.0
(1.7%)
SYNN
56.35
28,164.2
30,234.6
3,584.0
1.5x
11.3%
10,992.0
11.0%
BASF SE
DB:BAS
58.87
54,006.0
68,107.0
14,819.0
2.0x
27.2%
50,693.0
(1.2%)
Bayer AG
DB:BAYN
52.19
43,158.4
54,012.4
13,830.0
2.4x
24.3%
31,219.0
Mean (excl. Monsanto)
2.7x
25.6%
2.1%
Median (excl. Monsanto)
2.4x
25.9%
(1.2% )
Company
Syngenta AG
LTM Gross
Company
Monsanto Co.
Margin
55.7%
LTM
EBITDA
$3,457.0
LTM EBITDA
LTM
Margin
32.1%
EBIT
$2,900.0
Total Debt/ Total Debt/
Total Debt
EBITDA
LTM EBIT
Capital
LTM
3-yr. Revenue
Revenue
CAGR
4.8% $10,772.0
EPS
13.2%
(3.0%)
5.7%
5-Year EPS
Margin
26.9%
LTM
$2.77
2009E
$3.78
2010P
$3.29
CAGR
13.5%
11.2%
The Dow Chemical Company
13.4%
4,443.0
9.9%
1,616.0
3.6%
0.21
0.21
1.48
EI DuPont de Nemours & Co.
27.7%
4,246.0
15.6%
2,743.0
10.1%
1.92
1.92
2.36
7.7%
Syngenta AG
49.0%
2,313.0
21.0%
1,879.0
17.1%
14.62
14.62
17.57
6.8%
BASF SE
27.6%
NM
14.6%
3,677.0
7.3%
1.54
1.54
NM
NM
Bayer AG
51.4%
5,874.0
18.8%
3,282.0
10.5%
1.68
0.00
NM
NM
Mean (excl. Monsanto)
33.8%
16.0%
9.7%
8.5%
Median (excl. Monsanto)
27.7%
15.6%
10.1%
7.7%
A number of noteworthy points can be made based off the above figure. First,
Monsanto’s three-year revenue CAGR of 13.2% is far above both the peer group mean of
2.1% and median of (1.2%). This measure is more an indicator of Monsanto’s revenuegenerating ability than its peers’ lack thereof. The previous 36 months, after all, have
contained one of the worst recessions the world has experienced in decades; as such, it is
no surprise that diversified chemical corporations that thrive off a robust global economy
would experience contracting revenue. That said, it is more than impressive that
Monsanto has been able to not only “tread the waters” during tumultuous times, but
record double-digit top-line growth.
Page 17 of 28
Indeed, the five-year EPS CAGR also provides an impressive record of the Company’s
earning-generating power; while the peer group scored a median 7.7% compound growth
rate, Monsanto achieved growth north of 13%.
Across the board, Monsanto’s margins show material gains versus its comp set. In terms
of gross margins, Monsanto achieved 55.7% on an LTM basis, while median gross
margins remained below 30%. Margin expansion continues as we work down the income
statement. While peer median EBITDA and EBIT margins for the peer group were
15.6% and 10.1%, respectively, Monsanto clocked in margins of 32.1% and 26.9%.
To the extent that investors ought to pay a premium for a company that consistently
achieves significantly higher margins and offers a superior potential for growth, it seems
clear that the market currently is undervaluing Monsanto. The PEG ratio, for instance, is
nearly a half-turn below the comp set mean; this makes very little sense given
Monsanto’s precedent of unparalleled growth potential. With respect to EV/EBITDA
and EV/EBIT, Monsanto trades nearly in-line with its peer group. Only in terms of
EV/Revenue does Monsanto seem to trade above its peers; the implied premium,
however, is not undeserved as Monsanto’s gross margins are more than twice the peer
group median. In other words, more revenue dollars generated by Monsanto reaches its
bottom-line than do dollars generated by competitors.
Figure 17: Monsanto Comparable Company Analysis: Multiples
($ in millions, except per share data)
Company
Monsanto Co.
Enterprise Value to LTM
Equity /
Revenue
3.82x
EBITDA
11.9x
EBIT Book Value
14.2x
3.9x
The Dow Chemical Company
1.31x
13.2x
NM
1.7x
EI DuPont de Nemours & Co.
1.36x
8.8x
13.6x
4.4x
Syngenta AG
2.75x
13.1x
16.1x
3.9x
BASF SE
1.06x
NM
14.6x
Bayer AG
1.73x
9.2x
16.5x
Mean (excl. Monsanto)
1.64x
11.1x
Median (excl. Monsanto)
1.36x
11.2x
P/E
LTM
26.2x
2010P PEG
2009E
19.2x
2010P
21.3x
Ratio
1.6x
NM
NM
20.3x
1.8x
18.2x
18.2x
14.8x
1.9x
20.7x
20.7x
16.1x
2.4x
2.3x
28.1x
28.1x
NM
NM
2.4x
31.1x
NM
NM
NM
15.2x
2.9x
24.5x
22.3x
17.1x
2.0x
15.3x
2.4x
24.4x
20.7x
16.1x
1.9x
In order to fairly prescribe an EV/LTM EBITDA multiple based on comparable
companies, it is necessary to assign a premium. Besides benefiting from enhanced
margins and growth history, there exist non-financial considerations that justify a higher
valuation. As the industry leader, Monsanto holds leading market share in nearly all of
the segments it competes in (90% globally for seed and traits). Also, as the crop biotech
pioneer, Monsanto has a rich pipeline of innovative products in development. For these
reasons and others discussed herein, I find it appropriate to assign a 25% premium on the
comp set median EV/LTM EBITDA multiple, rendering a 13.9x multiple. Leveraging
this methodology, I arrive at a target share price of $88.12.
Page 18 of 28
Figure 18: Monsanto Comparable Company Analysis: Valuation
Comparable Public Companies Valuation
LTM Adjusted EBITDA
EBITDA Multiple (+ 25% premium)
Implied Enterprise Value
Less: Net Debt
Equity Value
Fully-Diluted Shares O/S
Target Share Price
$3,457.00
13.9x
$48,181.9
-$153.0
$48,028.9
545.06m
$88.12
EQUITY VALUATION: DISCOUNTED CASH FLOW ANALYSIS
While multiples-based valuation is useful in capturing ever-changing market values, it is
prudent to consider the fundamental reason an asset constitutes a good or bad investment:
its ability to render cash flows. To determine the intrinsic value of Monsanto, I
constructed a Discounted Cash Flow analysis based off of the operating model I built. In
calculating the present value of the Company’s ability to generate future earnings, I
projected cash flows out ten years until fiscal FY 2020E.
I made the following assumptions in projecting future cash flows:
Revenue is based off the historical growth rate of 14.0% obtained via Thompson
Reuters Baseline. Beginning in FY 2013E, revenue growth declines 100 basis
points per annum so as to level off at the terminal growth rate of 6.0% by FY
2020E.
Operating Costs are backed out of a combination of historical operating margins
and sell-side analyst expectations. To capture the value created through
management’s focus on providing operating leverage through the restructuring of
the Agricultural Productivity segment, I projected margin expansion of 3.0%
between FY 2011E and FY 2020E.
Interest Expense is based off a percentage of revenue, held constant through the
forecast period. Because Monsanto has the very little debt (Total Debt/EBITDA
of roughly a half-turn), this line item represents little significance.
Depreciation is based off a percentage of revenue, held constant through the
forecast period.
Taxes are based off the historical average tax rate of roughly 30%.
Capex / R&D is based off a historical percentage of revenue of 9-10%. As
indicated earlier, Monsanto will likely achieve leverage from growth over the next
few years. To capture this, I forecasted declining Capex / R&D from 9.5% in FY
2013E to 8.0% in FY 2020E. This assumption, I think, is very conservative.
Page 19 of 28
I made the following assumptions in determining an appropriate weighted-average cost of
capital (WACC):
Risk-free rate of return equal to the yield on 10-year treasuries, or 3.69%.
Expected return for equity-holders of 10.25%, suggesting a risk-premium of
6.56%.
Figure 19: Monsanto Weighted-Average Cost of Capital (WACC)
Weighted-Average Cost of Capital
Equity
Fully-Diluted Shares O/S
Current Share Price
Levered Beta
Risk-free Rate
Expected Return
Market Value
Weight in Cost of Capital
Cost of Component
Debt
BV of Debt
Net Interest Expense
Average Maturity
Pre-tax Cost of Debt
Tax Rate
545.06m
$72.50
1.1
3.69%
10.25%
$
Equity
39,516.85 $
96.78%
10.24%
$1,803.00
$58.00
15.00
6.0%
30%
Debt
1,315.64 $
3.22%
0.14%
WACC
40,832.49
100.00%
10.37%
These assumptions, along with data obtained from the Company’s FY 2009 10-K, render
a WACC of 10.37%, which I round up to 10.5%.
Assuming a WACC of 10.5% and terminal growth rate of 6.0% (equal to FY 2020E
revenue growth rate), the DCF model calculates a target share price of $94.83.
Figure 20: Monsanto Discounted Cash Flow (DCF) Analysis
Target Share Price
Upside / Downside from Current Price
Discount Rate
5.0%
$102.02
10.00%
10.50%
11.00%
11.50%
30.8%
9.50%
10.00%
10.50%
11.00%
11.50%
$91.04
$82.08
$74.62
$68.33
5.0%
40.7%
25.6%
13.2%
2.9%
-5.7%
5.5%
$111.54
$98.35
$87.82
$79.22
$72.07
6.0%
$123.78
$107.48
$94.83
$84.73
$76.48
6.5%
$140.09
$119.23
$103.60
$91.47
$81.77
7.0%
$162.94
$134.89
$114.88
$99.89
$88.24
Terminal Growth
Terminal Growth
##### 9.50%
Discount Rate
5.5%
53.8%
35.7%
21.1%
9.3%
-0.6%
6.0%
70.7%
48.3%
30.8%
16.9%
5.5%
6.5%
93.2%
64.5%
42.9%
26.2%
12.8%
7.0%
124.7%
86.1%
58.5%
37.8%
21.7%
Summary
Opportunities
Monsanto has a number of strong catalysts supporting a bullish outlook. This year, the
Company will profit from the broad-acreage introductions of two game-changing
products: Roundup Ready 2 Yield soybean and SmartStax corn seed. With both products
offering farmers double-digit yield enhancement, the opportunity to command larger
Page 20 of 28
market share and assume greater pricing power from these two products is substantial.
Also in the near-term, management’s commitment to repositioning the Agricultural
Productivity segment will be valuable. Though the restructuring initiative represents
certain upfront costs, the operating savings through SG&A reduction provided in
perpetuity offset the short-term inconvenience. To that extent, I think the concept of
2010 being a “transition year” is something of an aberration. While the Company
certainly continues to face challenges in the glysophate business, I think these troubles
are materially offset by the exciting prospects offered by the Seeds and Genomics unit.
Long-term opportunities will come from the Company’s record R&D pipeline, which
currently contains a total of 11 platforms in advance phases. Select initiatives include
traits characterized by: drought-resistance, further refuge-reduction, and nutrition
enhancement. Other long-term opportunities stem from the enormous potential for
increasing biotech adoption on a global scale. As the EU and other developed regions
continue to reassess the benefits of genetically modified crops, Monsanto will be wellpositioned to gain from widening acceptance. Finally, the global demographics are
unequivocally supportive of industry growth. As the leader by market share, Monsanto
will continue to exploit its competitive advantage of first-to-market so as to capture
enormous profits in the midst of an exponentially growing industry.
Risk Considerations
As with nearly any investment, there exist risk considerations in my analysis of Monsanto.
As described, both sub-industries Monsanto interacts in have experienced considerable
growth of competition in the recent past. With respect to the glysophate business,
Monsanto experienced considerable market share loss in 2009. While management
expects that business to stabilize in the near term, management also has suggested that
the Roundup brand has crossed the threshold of peak earnings. Though committed to
restructuring the business unit, it is distinctly possible that such efforts will not achieve
the success management has indicated in guidance.
Other risks come from the unstable regulatory climate. Though recent developments
suggest the day has come when the EU may begin to embrace agricultural biotechnology,
it remains premature to draw conclusive expectations.
As a global licensor of intellectual property, Monsanto is responsible for the surveillance
of licensee activity. Such surveillance and, in certain instances, litigation activity
represent substantial costs for the Company. The extent to which Monsanto succeeds or
fails in its efforts to protect intellectual property can affect costs, sales, and other
operating results.26
Conclusion
The material upside potential for Monsanto surpasses the limited risks associated with an
investment in the company. Not only is this message communicated by the Company
itself as is relates to having attributes of a “story stock,” but also by the quantitative
26
Monsanto Company Fiscal 2009 20-K
Page 21 of 28
analysis provided herein. By applying a weighting of 20% for each of the three
multiples-based valuation methodologies and 60% for the valuation derived with the
DCF, I arrive at a target share price of $91.18.
Figure 21: Monsanto Discounted Cash Flow (DCF) Analysis
Methodology
Absolute Valution
Relative Valuation: S&P 500
Relative Valuation: Comps
DCF Valuation
Weighted Target Price
Valuation Weighting
$90.08
20%
$88.03
20%
$88.12
20%
$94.83
40%
100%
Weighted
Price
$18.02
$17.61
$17.62
$37.93
$91.18
$94.83
$91.18
$90.08
25.8%
Upside
24.2%
Upside
Weighted-Average
Valuation
Absolute Valution
$88.03
$88.12
21.4%
Upside
21.5%
Upside
Relative Valuation: Relative Valuation:
S&P 500
Comps
30.8%
Upside
DCF Valuation
Current Share Price = $72.50
Page 22 of 28
Appendix 1: Monsanto Financial Statements from Company 10-K
Income Statement
Page 23 of 28
Balance Sheet
Page 24 of 28
Statement of Cash Flows
Page 25 of 28
532
4.7%
(84)
-0.7%
1,080
9.5%
1,099
15,006
36,684
51,690
3.27%
22.8
29.8
12.5
16.3
545
72.50
94.83
$
$
Plus: Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Less: Capex/R&D
% of Sales
Free Cash Flow
Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
Current Price
Upside/(Downside) to DCF
30.8%
1,732
Net Income
% Growth
Implied equity value/share
753
30.0%
52
0.5%
Net Interest Expense
Interest % of Sales
Taxes
Tax Rate
2,638
23.2%
Operating Income
Operating Margin
15.8
20.6
9.1
11.9
29%
71%
100%
1,241
13.0%
606
4.7%
(637)
-4.9%
1,232
9.5%
2,504
44.6%
1,083
30.0%
45
0.3%
3,734
28.8%
$12,964
14.0%
13.5
17.7
7.9
10.3
1,299
4.7%
691
4.7%
(909)
-6.1%
1,404
9.5%
2,921
16.7%
1,262
30.0%
45
0.3%
4,330
29.3%
$14,779
14.0%
1,772
36.4%
781
4.7%
(835)
-5.0%
1,587
9.5%
3,413
16.8%
1,463
30.0%
51
0.3%
4,927
29.5%
$16,701
13.0%
$11,372
Revenue
Growth
2,237
26.2%
874
4.7%
(935)
-5.0%
1,590
8.5%
3,888
13.9%
1,666
30.0%
57
0.3%
5,611
30.0%
$18,705
12.0%
FY 2014E
FY 2013E
FY 2012E
FY 2010E
Year
FY 2011E
Terminal Discount Rate =
Terminal FCF Growth =
Monsanto Company (NYSE: MON)
Analyst: Ryan A. Mayes
1/24/2006
Quantities in thousands
2,483
11.0%
970
4.7%
(1,038)
-5.0%
1,765
8.5%
4,316
11.0%
1,850
30.0%
63
0.3%
6,229
30.0%
$20,762
11.0%
FY 2015E
10.50%
6.0%
3,006
21.0%
1,068
4.7%
(1,142)
-5.0%
1,827
8.0%
4,907
13.7%
2,103
30.0%
70
0.3%
7,080
31.0%
$22,839
10.0%
FY 2016E
3,276
9.0%
1,164
4.7%
(1,245)
-5.0%
1,992
8.0%
5,349
9.0%
2,292
30.0%
76
0.3%
7,717
31.0%
$24,894
9.0%
FY 2017E
8.9
Terminal EV/EBITDA
4.25%
Free Cash Yield
14.7
99,563
4,227
6.0%
1,425
4.7%
(1,525)
-5.0%
2,439
8.0%
6,766
6.0%
2,900
30.0%
93
0.3%
9,758
32.0%
$30,494
6.0%
FY 2020E
Terminal Value
3,987
9.8%
1,345
4.7%
(1,438)
-5.0%
2,301
8.0%
6,383
8.7%
2,735
30.0%
88
0.3%
9,206
32.0%
$28,768
7.0%
FY 2019E
Terminal P/E
3,633
10.9%
1,257
4.7%
(1,344)
-5.0%
2,151
8.0%
5,871
9.8%
2,516
30.0%
82
0.3%
8,469
31.5%
$26,886
8.0%
FY 2018E
Appendix 2: Discounted Cash Flow Model
Page 26 of 28
Appendix 3: Pipeline from Company Investor Toolkit
Phase
Description
Average Duration
Discovery Conduct high-throughput screening of genetic database to identify valuable plant traits that can be used in the 24 to 48 months
breeding program and valuable genes that can be used to improve plants. Apply screens to broad categories of
interest, identifying multiple leads that can be investigated. Within each project category, there are specific
research platforms that guide discovery work. The ongoing research within each discovery platform will
generate new project leads, which are designated with a description and added in Phase 1.
1 Test gene configurations in plants to screen for desired performance. Determine which product leads show the
most promise for application to core crop plants.
2 Conduct lab and field testing of genes in plants to select commerical product candidates and to meet regulatory
requirements.
3 Demonstrate efficacy of traits in elite germplasm. Develop regulatory data as appropriate.
4 Produce bulk seed for potential sale, develop plans for commercialization / launch, and respond to regulatory
processes as appropriate.
Average Probability
of Success
5 percent
12 to 24 months
25 percent
12 to 24 months
50 percent
12 to 24 months
12 to 36 months
75 percent
90 percent
Page 27 of 28
Appendix 4: Earnings Seasonality from FY 2010 Q1 Conference Call
Page 28 of 28