There has been a lot of negative sentiment in the market lately. Inflation is on the rise, production and manufacturing is slowing down and consumer spending, which is responsible for the bulk of U.S. GDP, is falling.
However, through all of this market angst, investor fear and economic slowdown, Monsanto's (NYSE:MON) stock has managed to appreciate 137% in 2007, compared to a measly 6.5% return on the Dow Jones. Recently, the company nearly tripled first-quarter earnings, and that's just the start of the good news for investors looking to grow profit during this economic dry spell. Let's take a little look at what Monsanto is all about.
Monsanto is a major player in the agricultural industry, and producer of the herbicide known as "Roundup". Monsanto is also the leading manufacturer of genetically engineered seeds, and holds a 70-100% market share on various crops. In short, Monsanto is the "guy behind the guy" when it comes to farming.
It provides efficient seeds of all sorts to farmers all over the world. Monsanto is in the business of maximizing the potential of the seed itself and is quickly becoming the farmers' best friend by helping them make more money through efficiency and quality.
Monsanto's business is structured into two segments:
• Seeds and Genomics - this segment consists of the company's global seeds/traits business, and genetic technology platforms, including biotechnology, breeding and genomics.
• Agricultural Productivity - this segment consists primarily of crop protection products, residential lawn-and-garden herbicide products, and the company's dairy business. The Roundup business fits in here.
Killer Earnings, Sales and Revenue
Monsanto recently reported that its first-quarter earnings nearly tripled due to surprisingly strong herbicide and seed sales in Latin America. Sales were so good that Monsanto wound up increasing its earnings forecast for the whole year. Monsanto earned $256 million (46 cents per share) during its first fiscal quarter, which ended on November 30, 2007. This report comes in at almost triple its profit of $90 million during the same quarter last year. Monsanto's revenue during the first quarter jumped 36% to $2.1 billion - this far surpasses the $1.54 billion in revenue in the same quarter last year, as reported by the Associated Press in early January. (To learn more, read Earnings Forecasts: A Primer.)
Secret Weapon: The Product Pipeline
There has been huge progress in Monsanto's research and development arena. Monsanto has a number of new ideas in development and will be ready to deliver several ground-breaking products to customers by 2012, such as omega-3 enriched soybeans, which are expected to offer a land-based source of essential omega-3 fatty acids, and drought-tolerant cotton, which is designed to minimize risk in cotton farming by providing yield stability in water stressed environments.
The Oil Alternative
With oil hitting $100 per barrel and the ever looming supply squeeze, many industry's profits are being dwindled by higher transportation costs. Well, for Monsanto, this is not the case.
Increasing oil prices have spiked global demand for biofuels and production in Brazil, where Monsanto has about 30% of the corn seed market. Brazil is one of the world's largest producers of ethanol. The planting of additional acres in Brazil has, without a doubt, increased revenues significantly for Monsanto in its most recent quarter. Even with the rapid growth in herbicide sales, Roundup sales are still directly tied to the number of acres planted. (For more on the supply squeeze, check out Peak Oil: What To DO When The Wells Run Dry.)
The Bottom Line
With blazing earnings, a strong product pipeline, and the price of oil hitting new heights each month, Monsanto's stock price is bound to hit new highs. The markets are taking a pounding since the new year, leaving Monsanto looking like quite the bargain. Also, with the Federal Reserve's recent rate cut and the government's economic stimulus plan, Monsanto will most likely be at the forefront of this boost to business.