Investors Could Reap Profits From Monsanto

By Stephen D. Simpson, CFA | April 12, 2010 AAA

One of the classic clichés of the investment world is that "trees don't grow to the sky"; sooner or later, the mightiest of stocks stumbles. Investors who have been around a few years can no doubt recall plenty of examples ranging from Dell to Amgen, to even mighty Microsoft.

Now it is Monsanto's (NYSE:MON) turn.

How Monsanto Lost its Groove
This agribusiness giant has been a stellar performer in the stock market for most of its history, but performance stalled out in 2008 and has not come back since. With Wednesday's earning release, and a significant adjustment both to guidance and the company's operating philosophy, it seems that many of the analysts and professional investors who were not already souring on Monsanto are heading to the sidelines.

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Simply put, Monsanto pushed its advantage too far with its customers. Although the company's bioengineered crop seeds have delivered exceptional performance (and profits) over time, farmers have begun to complain over the last couple of years that Monsanto was pricing its newest seeds well ahead of the demonstrated performance. Combine this uncertain cost benefit trade-off with a tough economy, a difficult credit environment and competitive options from DuPont (NYSE:DD) and a host of Chinese competitors, and you have a real problem for Monsanto.

Making matters worse, the company's chemicals business (herbicides, mostly) has been weak for a while longer now. That stands in rather stark contrast to the success that fertilizer companies like Potash (NYSE:POT), Agrium (NYSE:AGU), or Yara (Nasdaq:YARIY.PK) have been enjoying. Fortunately for Monsanto, though, the company has been de-emphasizing chemicals in favor of seeds for some time and this mitigates the damage.

If that all was not enough (and believe me, it was), the company also has antitrust and public relations issues. Neither of these are likely to harm the business over the long-term (though enough farmers souring on Monsanto is clearly a risk), but they do represent headline risk for the stock. (For more, see Antitrust Defined.)

How Monsanto will Get its Groove Back
All is not lost, though. Monsanto is electing to retrench, making its prices more competitive and pushing for deeper penetration among farmers with its new seed products. The idea is that once the seeds demonstrate their advantages, Monsanto can gradually raise the prices and the customers (the farmers) will still see value in the product.

Corporate hubris is a tricky thing, and it is by no means exclusive to any sector of the market. What is encouraging here is that the company is admitting its mistakes and taking a few tough steps to both improve its status with the farmers and the long-term prospects for its shareholders. Better still, the company continues to invest in its R&D and further stretch its lead over convention seed options. (For more, see Buying Into Corporate Research & Development.)

Buy Stocks when it Rains
Nothing in this screw-up should change long-term view of the company's markets and opportunities. The basic thesis here is straightforward - the world will have to feed an increasing number of people from a decreasing pool of land in a more difficult environment (soil degradation, water shortages, climate change, etc.). Monsanto is a technology leader in this space and even if DuPont, Syngenta (NYSE:SYT) or Chinese competitors should gain share, there's more than enough business to make Monsanto work as a stock.

The Bottom Line
This is one of those opportunities that individual investors should explore thoroughly before passing up. A lot of professional investors will choose to avoid these shares until the growth returns, but it is fair to assume that the stock price will be higher then. In the meantime, patient investors can accumulate shares in an acknowledged leader in a growing market, but can acquire those shares a little more cheaply now because the giant tripped over its own beanstalk.

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