To be clear right from the start, I am a fan (and owner) of Monsanto (NYSE:MON). I think it is a fantastic (albeit flawed) company that has a major role to play in feeding the world against a backdrop of increasing pressures on land and water. I also know it's extremely controversial, and that saying anything favorable about Monsanto or the genetically enhanced seeds that it sells (alongside others like DuPont (NYSE:DD) and Syngenta (NYSE:SYT)) is a virtual guarantee for generating emails from those who want to "educate" me on how it's an evil company that will doom us all.
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Setting aside the emotional aspects of it, Monsanto is not the sterling stock idea it once was. Business is going gangbusters today, and investors have pushed up the valuation along the way. While I do believe the long-term outlook for Monsanto is excellent, investors looking to commit new money today do need to be disciplined about the price that they pay.
Fiscal Q3 Results Surprise to the Upside
Monsanto is clearly on a roll, as the company announced final results for the quarter that exceeded even its recently updated guidance. Revenue rose 17%. Corn stole the show, as revenue rose 35% on significant acreage gains for reduced refuge seeds. Soybeans were strong too (up 15%), but cotton (up 1%) and vegetables (down 10%) were both weak. Last and not least, "productivity" (herbicides, mostly) rose 14%.
Margins also improved in the quarter. Gross margin improved more than a point, with only modest improvement in seeds (10bp). While corn and soybeans both showed improved gross margin, weakness in the very lucrative cotton business hurt and vegetable seed margins (which are low to begin with) worsened. Nevertheless, operating income rose more than 30% as the company kept expense growth in R&D and SG&A at low levels. Here is one of the under-appreciated virtues of the Monsanto model - Monsanto's R&D capabilities would be beastly expensive to replicate, but the company doesn't have to increase incremental spending all that much to continue developing the pipeline.
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What's Next for the Bears?
The strong rebound at Monsanto over the past year or so has forced the bears to get creative to maintain their thesis. First, the idea was that Monsanto had permanently alienated farmers and was destined to lose share to DuPont and Syngenta. Then the bear story was that newer products like Genuity and Intacta weren't going to work as well as advertised or sell as well as management hoped.
Where do the bears go now? The easiest claim may be the that 2013 can't possibly be so good. The U.S. has seen some of the strongest corn planting numbers in several decades and key international markets like Brazil and Argentina are already considered "established" markets by Monsanto itself. There's also the idea out there that Monsanto and DuPont are in a "tit for tat" arms race and that DuPont will gain back share with its next releases.
Last and not least, there is the threat of government action. There are renewed pushes in the U.S. aimed at stronger (and clearer) labeling rules for foods containing ingredients grown from modified seeds.
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Balancing Bull, Bear and Pig
Though I would not ignore DuPont or Syngenta, Monsanto seems to have a real edge when it comes to its pipeline and the recent performance of newly launched products. If DuPont, Syngenta, Dow (NYSE:DOW), BASF (OTC:BASFY) and Bayer (OTC:BAYRY) have a strong chance of beating Monsanto (and both Dow and BASF collaborate with Monsanto), it may be in beating them to newer opportunities like rice and oilseeds.
Elsewhere, while there are public perception risks to GM crops in the U.S., the reality is that there is no serious effort to ban them or even reduce their use. For good or ill, "Big Farm" will fight that battle to the death and there is just too much money (and too many votes) at stake. In fact, with the EU apparently starting to reconsider its opposition to GM crops, a large new market could open up in the years ahead - to say nothing of the potential of selling to developing regions like East Asia, South Asia, Africa and Eastern Europe.
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None of this is really new, though. Strong results from products like Intacta (improving soybean yield by 10% in Brazil) and strong sales numbers are good, but they'll be hard to surpass. That makes Monsanto's valuation a little tricky today. From a more technical angle, I'm content to hold Monsanto at least until the point where estimate revisions catch up to the story, and I'd love to hold this stock for many years, based on its long-term potential.
The Bottom Line
Boiling it all down for readers, I like Monsanto's business and I do think there's real momentum in the company and in the shares today. That may be fine for nimble investors, but long-term holders ought to go over the numbers carefully before jumping in now. While I believe Monsanto will reward a long-term holder, there are going to be dips along the way and it may make more sense for investors to sit tight and wait for the next one.
Disclosure - Stephen D. Simpson owns shares of Monsanto since April 2010.
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