BERKO: Despite hiccup, Monsanto a good long-term pick
Dear Mr. Berko:
Early last year, you recommended Monsanto Co. I bought 50 shares for my IRA and 50 shares for my wife’s IRA at $66. We are a little bit ahead, but I have been disappointed in its performance. During the last 12 months, we’ve had a strong stock market, and Monsanto hasn’t done as well as the market. In fact, the stock has come down from its recent high price of $84 and we are concerned it may continue to fall in price. Do you think we should sell Monsanto and put the money in another issue that looks to have more upside potential? It seems to be such a boring company.
When I recommended Monsanto, you “pleaded” for a long-term, quality growth stock that you could own for 10 years without worry. Now you have worry ants in your pants! Are you talking to your hotshot broker again who wants to sell you more of his flashy stocks? Have you forgotten his last few recommendations so soon?
Monsanto (MON-$71.85), an $11.5 billion revenue company, divides its business into two categories: (1) seeds/genomics, biologically oriented to help growers produce higher yielding crops, generating 70 percent of revenues and (2) agricultural activity focusing on feed products for livestock and chemicals for crop protection, producing 30 percent of revenues. MON’s genetically modified products are so accepted by growers that nearly 85 percent of the corn and soybeans grown in the United States contain a licensed MON technology.
But a couple of years ago, MON’s impressive technology lead gave management an excessive case of executive hubris, encouraging the company to overprice its seeds and overproduce its crop chemicals and pesticides. As a result, customers were driven into the waiting arms of E.I. du Pont de Nemours and Co., Bayer AG and Syngenta AG. Revenues fell and profitability declined. Management corrected its strategy and did their mea culpas, but not before a year of subpar performance was recorded, forcing the stock to drop in price.
There are always short-term glitches in the performance of every global company. In the last decade, though, MON’s revenues more than doubled as earnings grew nearly sevenfold. And though commodity prices have cooled in the last year, agricultural markets will be red-hot again as the growing wealth of industrialized nations unlocks a huge pent-up demand. MON’s impressive research and development pipeline, innovations in agricultural biotechnology, new strategies focusing on yield improvement and an impressive product mix position it to aggressively grow its business in the world’s emerging markets. Yes, MON looks as exciting as a Japanese Kabuki dance. Its products have zero sex appeal, don’t lend themselves to splashy TV commercials, nor are they understood by the vast majority of Americans whose dinner tables are richly garnished thanks to the scientists at Monsanto.
MON is an extremely impressive company that should provide equally impressive revenue and earnings growth in the coming decade, plus attractive net profit margins of 15 percent or better. Tens of millions of its shares are owned by some of the world’s wisest investors. MON has a superb balance sheet and debt is a low 14 percent of capitalization. Revenues for this year are expected to come at $12.5 billion and exceed $16 billion by 2016, producing per-share earnings over $8 and a potential stock price of $160 to $180 a share. The niggardly dividend of $1.20 is not likely to increase much because management prefers to pay down debt and reinvest a substantial portion of its earnings. Continue to hold those shares, and if you have additional investable funds, purchase 50 more for each IRA. And in the next three years or so, I think MON will split 2-for-1, so then you’ll have 200 shares and possibly a substantial gain in value.