Ticker:
MON
Sector:
Materials
Industry: Agricultural Chemicals
Recommendation: HOLD
RECOMMENDATION: HOLD
Pricing
Closing Price $74.93
52-wk High $96.79
52-wk Low $63.47
Market Data
Market Cap
Total Assets
Trading Vol.
Avg.)
Valuation
EPS
P/E
Div Yield
(10/02/09)
(10/14/08)
(11/21/08)
$41.6B
$17.91B
5.0M (3 Mth.
$3.87
19.36
1.41%
Profitability & Effectiveness
ROA
12.32%
ROE
20.52%
Profit Margin
22.30%
Oper. Margin
32.74%
Daniel Parmar
hdpt3c@mail.missouri.edu
We currently have 400 shares of Monsanto, representing 3.15%
of our portfolio, and I recommend we hold them. Monsanto
continues to dominate a market that it essentially created more
than a decade ago. Through its ongoing commitment to research
and development and assertive capital allocation, the company
has positioned itself to grow value for its shareholders over the
long haul. The company has good growth potential over the long
term, particularly in countries like India and Brazil, where the
population is increasing and the production of food grains needs
to be stepped up.
The Agricultural Productivity segment has been sluggish after
Monsanto’s patent over a key ingredient of Roundup, their
flagship product, expired. The company has been focusing on its
other segment, Seeds and Genomics over the past few years,
and this strategy has been paying off. Monsanto is well
established in developing countries where most of the future
growth in this industry will come from, and this gives them an
edge over its competitors.
Concerns over the performance of the Agricultural Productivity
segment over the short term, negative perception about the
company, lawsuits regarding environment violations and bans in
some countries are some of the immediate challenges Monsanto
faces.
The company has to create a more positive public image and
further strengthen its Seeds and Genomics segment to take
advantage of the huge opportunities for growth in the future.
With strategic acquisitions in FY2008, the company is on the
right track to strengthen its presence in the industry through
diversification.
COMPANY PROFILE
Monsanto is the world's leading producer of seeds. It produces leading seed brands and develops
biotechnology traits that assist farmers in controlling insects and weeds, and provides other seed
companies with genetic material and biotech traits. The company produces seed brands in large-acre
crops like corn, cotton, and oilseeds, as well as small-acre crops like vegetables. Monsanto also
manufactures Roundup and other herbicides and provide lawn-and-garden herbicide products for the
residential market.
Monsanto sells its crop protection products through distributors, independent retailers and dealers, and
agricultural cooperatives. In some cases outside the United States, it sells such products directly to
farmers. Monsanto also sells certain chemical intermediates of its crop protection products to other
agricultural chemical producers, who then market their own branded products to farmers. The Company
markets its lawn-and-garden herbicide products through The Scotts Miracle-Gro Company.
The US is Monsanto's major market. However, Monsanto also has substantial operations abroad,
covering the regions of North America, South
America, Europe, Asia, Australia, and Africa.
Monsanto derived 50.1% ($5.7B) of its revenues in
FY2008 from the US, 16.9% from Europe-Africa
($1.9B), 11.1% from Brazil ($1.26B), 7.1% from Asia
Pacific ($811 million), 6.9% from Argentina, 3.8%
from Canada, 2.6% from Mexico, and the remaining
1.5% from other countries.
The company recorded revenues of $11,365 million in
FY2008, an increase of 36.1% over the financial year
ended August 2007 (FY2007). The operating profit of
the company was $2,721 million in FY2008, an
increase of 93.1% over FY2007. The net profit was
$2,024 million in FY2008, as compared with a net
profit of $993 million in FY2007.
Monsanto's development and marketing of
genetically engineered seed and bovine growth
hormone, as well as its aggressive litigation and
political lobbying practices, have made the company
controversial around the world and a primary target
of the anti-globalization movement and environmental activists.
Monsanto is constantly looking at ways to maximize the potential of seed -- both its yield potential and
the technology used to protect it -- so farmers can get more out of each seed. The company invests
heavily in research and development. Over the past five years, it spent about $3.6 billion, representing
9.2% of sales.
Monsanto was first incorporated as a subsidiary of Pharmacia in 2000, and then spun off as a separate
company in 2002. However, the original Monsanto company, which changed its name to Pharmacia, has
existed since 1901. The company is headquartered in St. Louis, Missouri, and has locations in more than
50 countries around the world.
BUSINESS SEGMENTS
AGRICULTURAL PRODUCTIVITY
The agricultural productivity segment consists of crop protection products (roundup and other
glyphosate-based herbicides and selective chemistries), dairy business, and residential lawn-and-garden
herbicide products. Roundup agricultural herbicides are the flagship of Monsanto's agricultural
chemicals business. The Monsanto industrial, turf, and ornamental business group operating under this
segment provides integrated weed control for industrial and large non-farm areas such as parks, golf
courses, zoos, roadsides, and other large green spaces.
In FY 08, Roundup and other glyphosate-based herbicides accounted for 36% of total sales. Patent
protection for the active ingredient in Roundup herbicides expired in the U.S. in 2000. Since then, the
company has repositioned itself as one of the lowest cost producers in an effort to mitigate declining
herbicide pricing and margins.
This segment contributed 45% of sales and 38% of gross profits in FY 08. Net sales for the segment
increased 48% in 2008 to $4.99 billion. Sales from Roundup and other glyphosate-based herbicides
contributed $4.09 billion, and other products added $902 million.
Major Products
Glyphosate-Based
Herbicides
Applications
Agricultural, industrial and turf applications for weed
control
Major Brands
Selective Herbicides
Lawn-and-Garden
Herbicides
Control of grass & weed in corn and other crops
Residential lawn-and-garden applications for weed
control
Harness
Roundup
Roundup
SEEDS & GENOMICS
Seeds and genomics consists of the global seeds and related traits businesses, and technology platforms
based on plant genomics, which increases the speed and power of genetic research. MON's seeds and
genomics segment focuses on corn, soybeans and other oilseeds, cotton and wheat. Through its Seeds
and Genomics segment, the Company produces seed brands, including DEKALB, Asgrow, Deltapine,
Seminis and De Ruiter, and it develops biotechnology traits that assist farmers in controlling insects and
weeds. Monsanto also provides other seed companies with genetic material and biotechnology traits for
their seed brands. After the loss of patent protection for Roundup, Monsanto has focused on capturing
value and profitability in its patent-protected seeds and traits business, and expanded its product line
through its acquisitions. This trend makes the growth and margin outlook for Monsanto's seeds and
genomics segment superior to that of its agricultural productivity segment.
This segment contributed 55% of sales and 62% of gross profits in FY 08. Net sales for the segment
increased 28% in 2008 to $6.4 billion. Corn Seed and Traits was the largest contributor to this segment,
adding $3.54 billion in net sales.
Major Products
Germplasm
Biotechnology
Traits
Applications
Row crop seeds: Cotton, Corn, Soybean, etc
Vegetable seeds: Tomato, eggplant, cucumber,
etc.
Crop protection from borers, rootworm and
bollgard
Enable crops to be tolerant of Roundup & other
herbicides
Major Brands
DEKALB, Channel Bio, Asgrow,
Deltapine
Seminis, Royal Sluis, Peto Seed,
De Ruiter
Yieldgard, Bollgard
Roundup Ready, Roundup Ready
2 Yield
As can be seen from the figure, the Seeds and
Genomics segment has overtaken the Agricultural
Productivity in terms of revenues contributed over
the past few years. Monsanto's strategic prowess is a
great competitive advantage. Through acquisitions,
such as DeKalb, Asgrow, and Delta and Pine Land,
the company has simultaneously built a platform for
its trait technologies and a barrier to entry for
competitive technologies. The company is also
continuously seeking new ways to present the most
compelling value proposition for growers. For
example, Monsanto developed a first-of-its-kind
program that will reduce crop insurance premiums
for farmers planting its elite triple-stacked corn
hybrids on 80% of their acres. Measures like these
exemplify the company's commitment to keep the
competition at bay.
Monsanto has a healthy balance sheet and harvests a
lot of cash. Cash from operations has averaged 24% of
sales over the past five years, giving the firm plenty of
flexibility to service its financial obligations, invest for
growth, and return cash to shareholders. Sales and
Net Income have been growing at a rapid pace over
the past 5 years.
Cash from operating activities in 2008 was $2.8B as
compared to $1.8B in 2007.
Another important competitive advantage for
Monsanto is its production and distribution
capabilities. It has proved itself consistently superior
to its rivals in anticipating changes in demand and the
rate of adoption for new technologies. Thus, it has
been able to meet this demand with the right product, in the right place, at the right time.
INDUSTRY OUTLOOK
The U.S farm economy and crop markets are mature, with cultivation of corn the largest use for
agricultural chemicals. Most of the growth in global nutrient use has come from countries in Asia and
Latin America, as these regions' rising populations and income levels boost the need for grain
production. Monsanto has a strong presence in countries like Brazil and India, and this will help them
gain an advantage as other companies in this industry start to shift focus to these countries in the
coming years.
As population increases around the world and the amount of arable land remains the same, farmers will
look to better the quality of their yield. Companies in this industry will play an important role as they
seek to develop biotechnology traits that will assist farmers. This presents a good long-term growth
opportunity.
COMPETITOR COMPARISON
Ratio
Market Cap.
EPS
P/E
Current Ratio
Debt/Equity
ROA
ROE
Profit Margin
Operating Margin
Monsanto
40.91B
3.87
19.36
2.29
16.95
12.32
20.52
22.3
32.74
Syngenta
20.01B
2.67
16.14
1.9
61.29
7.34
17.96
20.93
26.42
Potash
25.28B
7.86
10.88
1.57
72.79
21.68
40.39
37.53
46.09
Mosaic
20.56B
5.27
8.78
3.27
16.4
18.42
30.87
21.91
23.34
Industry
2.37B
3.92
8.35
2.55
44.14
17.7
31.37
16.05
22.68
SWOT ANALYSIS
STRENGTHS
Strong bioengineering capabilities
Monsanto has developed competencies in applying bioengineering to agriculture. Monsanto's traits
technologies enable it to develop herbicides and seeds with superior traits such as weed resistant and
improved yield. The company invested a substantial portion ($980 million) towards R&D in FY2008. The
company has also entered into a number of agreements to expand its R&D capabilities further. For
example, Archer Daniels Midland Company, Deere & Company, and Monsanto collaborated to research
on technologies and processes that turn crop residues into feed and bioenergy products. Monsanto's
focus on applying bioengineering to agriculture not only gives it a competitive edge but also enables it to
enhance its product portfolio.
Strong brand portfolio
Monsanto has a strong brand portfolio. Roundup, the company's flagship branded product, is one of the
most popular herbicides in the world. Seminis and De Ruiter are strong brands in the vegetable seeds
business. The company's strong brand portfolio enhances its market leadership position.
Diversified operations
Monsanto has diversified its operations both product wise and geographically. The company derived
56% of its revenues from seeds and genomics segment in FY2008. In this segment, the company derived
55.6% of revenues from corn seeds and traits, 18.4% from soybean seed and traits, 11.7% from
vegetables and fruit seeds, 7.2% from other crops seeds and traits, and 7.1% from cotton seed and
traits. The company derived the remaining 44% of its total revenues from agricultural productivity
segment in FY2008. In this segment, the company derived 81.9% of its revenues from Roundup and
other glyphosate-based herbicides and 18.1% of its revenues from all other agricultural products.
Diversified operations spread out the company's business risk and help the company in catering to a
wider customer base. This in turn could boost the profits of the company.
Robust financial growth
Monsanto has recorded a robust financial growth in recent times. The company's revenues increased at
a CAGR of 21% for the period 2004-08. In addition, the company's operating profit increased at a CAGR
of 51% for the same period. The company's net profit also increased considerably at a CAGR of 66% for
the period 2004-08. High revenue and profit growth indicates better financial stability of the company
and provides the company with growth opportunities; while strong margins are indicative of good cost
management in the company.
WEAKNESSES
Lawsuits regarding environmental violations
In February 2009, a group of residents from Sauget, Illinois filed a suit against Monsanto and its
subsidiaries alleging that for years the company dumped toxic and carcinogenic chemicals that poisoned
their town. This is just one of many examples. Lack of precautionary measures could lead to further
penalties in the future and disrupt the company's operations and also involvement in such speculation
could affect the profitability and credit rating of the company.
Distributor concentration
Monsanto is dependent on a few distributors for some of its product lines. Although no single customer
(including affiliates) represented more than 10% of the company's consolidated worldwide net sales in
FY2008, its three largest US agricultural distributors and their affiliates represented, in the aggregate,
16% of worldwide net sales and 32% of the company's US net sales. In FY2008, one major US distributor
and its affiliates represented about 8% of the worldwide net sales for its seeds and genomics segment,
and about 9% of the worldwide net sales for the company's agricultural productivity segment. The
company's revenues are therefore linked to the financial performance of these distributors.
OPPORTUNITIES
Emerging market of India
Monsanto's Indian operations are a strategic fit with the country's developmental requirements. For
instance, cotton is one of the major cash crops cultivated in India. Although the world's largest cotton
cultivation area 9.3 million hectares (25%) is in India, the country ranks second (18%) in total cotton
production in the world. To increase its cotton production, India is increasingly been looking at hybrid
cotton cultivation. Monsanto has been promoting its products in India to take advantage of the
situation. For instance, in FY2008, 4.5 million cotton acres were planted with the technology, a 275%
increase over the prior year. India has 16% of the world's population but only 2% arable land. With
population crossing the 1.2 billion mark by 2020 and arable land decreasing, increasing yield and
productivity is the only way to solve the food insufficiency problems. Monsanto can leverage its
bioengineering capabilities to strengthen its Indian operations.
Focus on soybean
According to the US Department of Agriculture, in the year 2008, the US, Brazil, and Argentina
collectively accounted for more than 90% of world exports of soybeans, soybean meal, and soybean oil.
Furthermore, China ranks among the largest consumers of soybean meals, while Latin America, North
Africa, and the Middle East countries and emerging Asian markets such as India are likely to be the
largest importers of soybean oil. Driven by a surge in health products, soy-based products have become
one of the fastest-growing segments in the food industry. By receiving approval for its flagship product
in the relevant markets, the company can leverage its global operations and achieve stronger top line
growth in the medium to long term.
Acquisitions to enhance market share
Monsanto acquired a number of companies in FY2008 to enhance its market share. In June 2008,
Monsanto acquired De Ruiter Seeds Group, a Dutch-holding company that owns and operates De Ruiter
Seeds. Monsanto also acquired Marmot, which operates Semillas Cristiani Burkard (SCB), a privatelyheld seed company headquartered in Guatemala City, Guatemala. SCB is the leading Central American
corn seed company focused on hybrid corn production. In December 2008, Monsanto acquired Aly
Participacoes, which operates the sugarcane breeding and technology companies, CanaVialis and Alellyx.
Their location and expertise in Brazil are important, as Brazil is the world's largest producer of
sugarcane, the largest exporter of finished sugar, and the world's second-largest producer of ethanol.
With these acquisitions Monsanto would be able to build a stronger platform to promote the company's
brand image and further strengthen its market position and customer base.
Proposed launch of new products
Monsanto is having four major products in various stages of commercialization. The company's Corn
Yield Drought 1 Tolerant, the drought tolerant corn, is in the fourth phase of commercialization. This
phase includes development and testing of best trait and germplasm combinations for commercial
launch. The company's Genuity SmartStax Corn is also in the fourth phase of commercialization. Genuity
SmartStax corn is the first, most durable, and highest-yielding package for total weed and bug control in
corn. Genuity SmartStax moved into Phase 4, the final step prior to the product's planned 2010
commercial launch, pending regulatory approvals. This phase includes development and testing of best
trait and germplasm combinations for commercial launch. Monsanto's Soy Yield Intrinsic Development,
the higher yielding soybean, moved into Phase 3. Successful commercialization of these products over
the next few years would further enhance Monsanto's product portfolio.
THREATS
Extensive regulations
Stringent regulatory and legislative requirements affect the development, manufacture, and distribution
of Monsanto's products. Obtaining permits for mining or production or testing, planting, and import
approvals for seeds or biotechnology traits can be time-consuming and costly, with no guarantee of
success. The failure to receive necessary permits or approvals could have near-and long-term effects on
the company's ability to sell some current and future products.
Intense competition
Monsanto faces intense competition from many companies that are engaged in plant biotechnology and
breeding research and agricultural chemicals. The company also has strong competition from
agricultural biotechnology firms and from major agrichemical, seed, and food companies. The company
faces continued competition for its Roundup herbicides and selective herbicides product lines. The
extent to which the company can realize revenues from these products would depend on its ability to
control manufacturing and marketing costs.
Safeguarding intellectual property rights
Intellectual property rights are crucial to Monsanto's business, particularly in the seeds and genomics
segment. The company obtains and protects its intellectual property rights in jurisdictions in which the
products are produced, used or imported. However, even if protection is obtained, competitors,
farmers, or others in the chain of commerce may raise legal challenges to its rights or illegally infringe on
the company's rights through means that may be difficult to prevent or detect.
Bans on genetically modified crops
Monsanto faces a serious problem concerning bans imposed on its genetically modified crops. In
February 2009, the Governments of France and Greece decided to ban genetically modified corn crops
in their countries, citing threat to human or animal health and contamination of other crops creating
environmental problems. These bans would seriously affect the company's market position in those
countries. Similar bans in other countries in the future would directly affect the company's revenues and
market share.
FINANCIAL TRENDS
-
-
Monsanto realized record sales for a fifth consecutive year in FY 2008, with revenues of $11,365
million, an increase of 36.1% over FY2007. The operating profit of the company was $2,721 million
in FY2008, an increase of 93.1% over FY2007. The net profit was $2,024 million in FY2008, as
compared with a net profit of $993 million in FY2007. Net Income too increased by 104% in FY 2008.
The company generated cash of around $1.62B even after strategic acquisitions like De Ruiter Seeds
and Aly Participacoes.
Monsanto is implementing an $800 million share repurchase program, signaling management’s
confidence in the stock.
Monsanto has also embarked on a cost restructuring program to reduce future costs by $250
million a year, with one-third realized in fiscal year 2010, and the rest in fiscal year 2011.
-
The company is now focusing more on its Seeds and Genomics segment to grow revenues, as the
Agricultural Productivity segment continues to struggle after the patent expiry for Roundup
herbicides. This strategy is helping the company as the segment recorded 55% of sales and 62% of
gross profits (up from 45% five years ago) in FY 2008. It is also trying to diversify more in this
segment with the acquisition of two Brazilian sugarcane companies.
STOCK PERFORMANCE
As the charts below show, Monsanto has outperformed the S&P500 consistently over the past 5
years. It has also performed better than its close competitor, Potash for most of the past 5 years,
but has lagged behind in 2009.
5 YEAR STOCK PERFORMANCE VS. S&P500 AND POTASH
YTD STOCK PERFORMANCE VS. S&P500 AND POTASH
VALUATION
I used the Owner Earnings model to find the intrinsic value of Monsanto.
I calculated the discount rate taking the risk free rate, beta, and the market risk premium. I used an
average beta of .72, a risk-free rate of .198 and a market return of 11%. Using these numbers, the
discount rate works out to be:
K= 0.00198+0.72(0.11-0.00198) = 7.9%
However, this discount rate was too low, so I assumed a rate of 11%. I used a growth rate of 10% for
this year, and a higher growth rate of 14% for the next two years through 2012. The Seeds and
Genomics segment has been growing at 28% on average over the past 5 years and is expected to
maintain an 18% annual growth rate through FY 2012. I used a lower growth rate to account for the
sluggish growth in the Agricultural Productivity segment. I used a rate of 12% for the next 4 years,
and then 8% for the rest of the first stage. For the second stage, I used a growth rate of 3.50%.
Using these numbers, the intrinsic value works out to be $77.89. Since the stock is currently trading
at $74.93 (as on 10/02/09), I believe that Monsanto is slightly undervalued. Though Monsanto
seems to have good growth prospects, due to the problems they face with their biggest product,
Roundup, negative public perception and the bans on their products in some countries, I
recommend a HOLD on this stock right now.
Below is a sensitivity analysis showing the intrinsic value at different discount and growth rates:
Discount Rate
10%
11%
12%
13%
14%
15%
8%
71.39
61.73
54.39
48.64
44.01
40.22
First Stage Growth
10%
82.81
71.26
62.51
55.67
50.17
45.67
12%
96.05
82.3
71.9
63.77
57.25
51.92
14%
111.39
95.07
82.72
73.09
65.38
59.09
16%
129.13
109.79
95.19
83.8
74.71
67.29
INTRINSIC VALUE CALCULATION
Two-Stage Discounted Free Cash Flow Valuation Model
assuming discount rate (k) of
Free Cash Flow ("owner earnings") in 2009:
Net Income
Depreciation & Amortization
Average Capital Expenditures
Free Cash Flow (Owner Earnings)
$
$
$
$
11.00%
2,024,000,000.00
573,000,000.00
(918,000,000.00)
1,679,000,000.00
FIRST STAGE
2010
2011
Year:
2012
2013
2014
2015
Prior Year Free Cash Flow
First Stage Growth Rate
$
1,679,000,000.0
10.0%
$1,846,900,000.0
14.0%
$2,105,466,000.0
14.0%
$2,400,231,240.0
12.0%
$2,688,258,988.8
12.0%
$3,010,850,067.5
12.0%
Free Cash Flow
Discounted Value per annum
$
1,846,900,000.0
$1,846,900,000.0
$2,105,466,000.0
$1,896,816,216.2
$2,400,231,240.0
$1,948,081,519.4
$2,688,258,988.8
$1,965,631,803.3
$3,010,850,067.5
$1,983,340,197.9
$3,372,152,075.6
$2,001,208,127.7
Sum of present value of owner earnings
SECOND STAGE
Residual Value
Free Cash Flow in year 10
Second Stage Growth Rate
Free Cash Flow in year 11
Capitalization rate (k-g)
Value at end of year 10
Present Value of Residual
Intrinsic Value of Company
Shares outstanding assuming dilution
Intrinsic Value per share
$19,397,342,165.6
$
$
$
4,757,693,287.6
3.50%
4,924,212,552.7
7.50%
65,656,167,369.48
$23,123,083,083.35
$42,520,425,248.93
545,900,000
$77.89
2016
2017
2018
2019
3,372,152,075.6 $ 3,776,810,324.6 $ 4,078,955,150.6 $ 4,405,271,562.6
12.0%
8.0%
8.0%
8.0%
$ 3,776,810,324.6 $ 4,078,955,150.6 $ 4,405,271,562.6 $ 4,757,693,287.6
$2,019,237,029.7
$1,964,663,055.9
$1,911,564,054.4
$1,859,900,161.1
$
RESOURCES USED










www.wsj.com
www.morningstar.com
www.monsanto.com
www.cnbc.com
www.finance.yahoo.com
www.finance.google.com
www.seekingalpha.com
www.reuters.com
Standard & Poor’s Stock Reports
Dow Jones Stock Reports