Friday, August 7, 2009

Volume 3, Issue #74

Also in Today's Issue...

Monsanto (NYSE: MON) is the world's leading developer of bio-engineered seeds for everything from cotton to eggplant. The company also markets a full-line of herbicide products, including the popular Roundup brand, for both lawn/garden and commercial applications.

Competitive Advantages: Whether it's large-acre harvests of corn and soybeans or smaller crops such as tomatoes and cucumbers, Monsanto has a full inventory of seeds that enable farmers to squeeze more out of every acre.

These aren't your garden-variety fruit and vegetable seeds. Years of genetic research have led to the development of superior products that not only maximize yields, but also protect against insects, herbicides, heat, disease and other such threats.

As you might expect, customers are willing to pay premium prices for these added traits. For example, a typical bag of run-of-the-mill corn seeds sold for about $100 last year, while a bag of Monsanto's "triple-stacked" bio seeds fetched $245.

Monsanto didn't just one-up the competition -- it virtually created this entire industry from the ground up about ten years ago. And with more than 280 million acres of genetically-enhanced crops currently planted in two dozen countries around the world, it's a huge market.

Of course, success has invited competition, but Monsanto's research, production, and distribution capabilities are simply unrivaled. In fact, other players like Dow Chemical and BASF have sought out partnership agreements rather than try to beat the company at its own game.

Catalyst(s): Some governments and political groups have spoken out against genetically modified seeds, but that resistance is fading amid irrefutable evidence that these crops are environmentally friendly and even have nutritional benefits. In fact, the World Trade Organization has been pressuring the European Union to lift certain restrictions.

Clearly, unlocking new markets will spell plenty of potential opportunities for Monsanto. And this innovative company is already preparing for a surge in demand. The firm typically plows about 10% of its sales right back into research and development. Right now, it's investing $2.6 million every single day on new traits, breeding, and genomics work.

And those ambitious efforts have again borne fruit. On Monday, federal regulators gave the green light for Monsanto to begin distribution of its eagerly anticipated "SmartStax" corn seeds. These next-generation seeds combine as many as eight different traits (including above and below ground pest protection) in a single tiny seed.

The new all-in-one seeds will be warmly welcomed by farmers and are expected to be planted on up to 4 million acres within the first year of availability. Thanks to certain incentives, my staff and I feel that penetration for the new product will expand rapidly to more than 60 million acres over the next five years -- out of roughly 90 million acres of corn nationwide.

SmartStax could also be headed for farms in Japan, Taiwan and South Korea. But that isn't all the company has cooking. Among other developments in the pipeline, Monsanto's drought-resistant seeds are in the final phases of development and could soon protect entire harvests from the ravages of a severe drought.

These and other new product launches will deepen the firm's cash flow stream and whip up excitement in the investment community.

Valuation and Outlook: While grain prices will fluctuate, demand for Monsanto's products is unwavering. After all, whether soybeans sell for $7 per bushel or $12 per bushel, farmers will always be interested in maximizing their output.

But odds are good that prices for agricultural commodities will continue to strengthen.

First, rising global populations means there are millions of new mouths to feed each year. At the same time, demand for biofuels is further putting a strain on supplies -- ethanol production ate up more than one-fourth of the nation's corn harvest last year. Finally, rising incomes in emerging markets have led to a profound change in dietary habits.

Specifically, we are eating much more meat these days. For example, China's annual per capita meat consumption was 110 pounds last year, versus just 40 pounds back in 1980. Animals consume far more grains than humans pound for pound, so increased meat consumption has triggered huge demand for livestock feed.

Food, fuel and feed -- three different groups all hungry for the same crops. Unfortunately, the amount of arable land is relatively fixed. That means farmers around the world will be challenged to grow more from each acre of soil, and they will need Monsanto's help to do so.

Through the first six months of 2009, sales have climbed to a record $6.7 billion and earnings are up +19% over last year's pace. Based on full-year profits of $4.50 per share, the stock is currently trading at a forward P/E of just under 19 -- well below the premium multiple of 49 it has commanded on average over the past five years. Not surprisingly, management is expecting its gross profits to double in the U.S. and triple overseas by 2012.

Action to Take --> It's no secret why Monsanto continues to grow like a prize watermelon. The firm's seeds require fewer inputs (water, fertilizer, etc.) and spit out more bushels per acre, so farmers keep coming back for more.

If SmartStax proves to be even half as successful as initially thought, MON should power its way back into triple-digit territory.

Good Investing!

-- Nathan Slaughter
Editor
StreetAuthority Market Advisor