MON- Monsanto Co

[feynmanresearch]

Monsanto Company is a publicly traded American multinational agrochemical and agricultural biotechnology corporation headquartered in Creve Coeur, Greater St. Louis, Missouri. It is a leading producer of genetically engineered (GE) seed and of the herbicide glyphosate, which it markets under the Roundup brand.

 

Monsanto was one of the first companies to apply the biotechnology industry business model to agriculture, using techniques developed by Genentech and other biotech drug companies in the late 1970s in California. In this business model, companies invest heavily in research and development, and recoup the expenses through the use and enforcement of biological patents. Monsanto's application of this model to agriculture, along with a growing movement to create a global, uniform system of plant breeders' rights in the 1980s, came into direct conflict with customary practices of farmers to save, reuse, share and develop plant varieties. Its seed patenting model has also been criticized as biopiracy and a threat to biodiversity. Monsanto's role in agricultural changes, biotechnology products, lobbying of government agencies, and history as a chemical company have made the company controversial.

 

Let’s  take a look at the financials:

ROIC: ROIC has been strong, stable and predictable for the last 10 years. TTM is 16.30%, which is in line with ROIC of past 3 years.

ROA: ROA has been in the low teens for the last 5 years. ROA for the last ten years has been somewhat predictable and consistent, although not as much as I’d like.

ROE: TTM ROE is 23.07%, which is similar to past 3 years ROE. ROE is stronger and more consistent than ROA, although I would not rate it at 5 stars for consistency.

Gross Margins: Fantastic gross margins in low to mid 50% range. Gross margins have been very strong, consistent and predictable.

Net Margins: TTM margin is 23.53%. It is very impressive and somewhat higher than net margins of past 10 years.

Operating Margin: TTM margin is 25.70%. Operating margin is very consistent and strong throughout the past 10 years.

LT Debt to Total Assets:  TTM is 37.72.  This is an aberration from the past 10 years figures, but nonetheless is a cause of concern.

Interest coverage: Current interest coverage is 17.

Current ratio:  Current ratio has been basically in the low 2 range over the past ten years.

Quick Ratio: Quick ratio has been in the mid to high 1 range over the past ten years.

EPS( diluted):  TTM $5.50. EPS have been in a rise of the past 5 years.

Gross Profit: Strong rise in profits of the past 10 years.

SGA to Gross Profit:  It has been predictably around the 0.3, or 30% range. This is an indication that Monsanto is very strong competitively.

 

Valuation:

TTM P/E 17.42, Forward P/E 14.7,  P/B 5.4,  P/S 3.1,  PEG ratio 1.56,  EV/EBIT 13.12.

It is not exactly cheap, but it’s not very expensive either.

The company is fairly valued at this price, so I would recommend buying on the dips/ market decline/ recession.

 

Other positives:  Consistent dividends, history of share buybacks.

Some negatives: High capital intensive industry, not stellar debt levels.

Risks: Negative popular sentiment towards GMO, potential government regulation.

Catalysts: Potential, although uncertain Merger with Syngenta AG (SYT).

 

What’s your guys opinion on Monsanto?

 

Cheers,

IC

 

 

 

 

 

 

[Jurgis]

I bought a tracking position recently to monitor MON.

It's not cheap, but the stock has gone nowhere for 2.5 years in bull market (admittedly not agri bull market).

 

The long term growth has been 9-12%.

 

CEO has been in Barron's top CEO list for a while - some would say that's a kiss of death though. ;)

I think he's been successful - as evidenced by past results - but possibly more mainstream successful rather than "outsider" successful.

 

Overall, the good news is that nobody's been talking about MON recently, not even Barron's.

But then you had to come here and start this thread.  >:(

Just kidding.  ;)

 

Bill Nygren and Wallace Weitz bought some recently: http://www.dataroma.com/m/stock.php?sym=MON

 

[rogermunibond]

Had an opportunity to buy shares in 2010 at $50 and did not.  It seems like recent downgrade has been due to SYGT deal not coming off, rather than weakness in the core MON seed business, no?

 

 

[Jurgis]

Actually, MON stock rallied when the deal cancellation was announced.

 

Right now I don't have an opinion if this was positive or negative.

[dwy000]

With cancellation of Syngenta deal, management has committed to a target of doubling EPS by 2019.  That's aggressive for a company with single digit top line growth and stable margins.  There will undoubtedly be a ton of share buybacks and possibly more debt.  I worry it becomes an IBM like goal where this takes precedence over investing for the long term and growing the business.  But it's a great company with as good a moat as there is.

[Guest Schwab711]

Well now that the cat's out of the bag... MON is incredible. I think their next wave of crops is going to further entrench them. There's an article floating around discussing generic round-up and how little demand there is for it.

 

Hopefully this isn't too off-the-beaten path for an investment thesis. MON has all the wonderful characteristics of a biotech, but farming environments change significantly faster (resistance, soil quality, erosion, ect) than the human body, which should prevent generic competition. They seem well-positioned to eventually represent the majority of profits from the agriculture cycle. MON is definitely more of a cyclical company than they appear, but I took a position in MON.

 

I'm surprised BRK is not invested at these levels. Howard Buffett works with MON extensively and Bill Gates has a personal stake. I know GMOs are controversial, but it seems like a good bet here.

[valueyoda]

I have watching the stock after Glenview's great presentation at the Sohn Conference: www.sohnconference.org/wp.../IraSohn2014_GlenviewExternal.pptx; Great secular possibilities, dismal near term cyclicality, as farm incomes are bound to decline in the coming years after a decade long boom.

[Guest Schwab711]

Does anyone have a relatively recent industry primer or research on the agriculture or seed markets? What is the bear case for MON?

[feynmanresearch]

Does anyone have a relatively recent industry primer or research on the agriculture or seed markets? What is the bear case for MON?

I have one from 2007. I think I have sent it to you guys with my primer collection. I'll try to get an even more recent one

[A_Hamilton]

Does anyone have a relatively recent industry primer or research on the agriculture or seed markets? What is the bear case for MON?

 

Bear case is what happens if soybean and/or corn prices stay low enough that you can't make an economic return using MON's MUCH more expensive seed. Also, based on what crop is being planted MON's product is more or less effective at improving crop yields....so what is being planted matters.

[Picasso]

Been digging deeper into MON and came to the conclusion that we can't properly value the business on past trends.  It seems like ethanol was a big driver of returns for MON and given the destruction in the oil sector I just can't see how the profit margins will go up to drive further returns.  The past 10-15 years was a once in a lifetime value driver for the company in my opinion.  I couldn't figure out why MON was so bent on acquiring SYT until it occurred to me that they realized the best is behind them and they need to 1) use their expensive stock currency to fund a deal while they could and 2) find aggressive ways to maintain expectations. 

 

I just can't see how they get to $10 of EPS or more in several years.  As Sequoia said, their positions will a financial roadmap all failed and they were likely to avoid them in the future.

 

If Glenview pulls out of the stock, the bottom might fall out.  I'm staying away until I can properly assess the earnings power of the business going forward.  I had bought some shares in the low 100's to track the position and will be selling those shares.

[Guest Schwab711]

Do you believe the 10% mandate will fail to be extended in 2022? Do you think the mandate will end before then?

 

I think most of the drop is due to a renewed push to eliminate the ethanol mandate early and the recent anti-GMO stance of China and Russia. I appreciate your opinion and look forward to your follow-up. Embarrassingly, I did not fully consider the effects of the ethanol mandate on MON's profitability. The Midwest has seen tremendous growth in E-85 gas stations, which could offset part of the loss of other states dropping their ethanol mandate. It's simply not efficient to use corn or soybean-based ethanol in many states with low corn or soybean production (such as Hawaii or Florida). However, it does seem to be economical for the vast majority of states (from a population perspective). Due to that, I don't think an elimination of the mandate will be as devastating as the market is currently implying. If anything, the improvement in fuel efficiency is the most troubling trend for corn/soybean farmers in the US.

[Picasso]

It seems likely to me that the ethanol mandate is either not extended; or worse repealed if the Republicans win the presidential race.  But then again you have so many moving pieces that influence the decision on both ends.  If corn prices are falling with the mandate, imagine where they would fall without it.  I'm not a farmer nor have a lot of insights into the grain space but I think the signs point to some kind of reduction.  A mandate change would likely completely change the economics of MON and a way of evaluating this risk would be to look at their market share pre-2005.  How do you justify continued ethanol mandates in this kind of energy production/consumption environment?  The costs seem to outweigh the benefits.

 

The story reminds me a lot of NOV.  You had a massive bull cycle in oil rigs, dominant market share (No Other Vendor), and a moderate multiple on peak earnings.  Suddenly the economics of the business completely deteriorate when that cycle turns the other way.  It's sort of like having a high fixed cost base that is dependent on high commodity prices and controlled supply.  I think we have a similar picture here with future low prices (if we continue having more efficient vehicles, increased oil production yields, unwinding of large commodity bubble post BRIC implosion, etc.) with uncontrolled supply highly dependent on changes in the ethanol mandate. 

 

If you extrapolate the earnings of MON on past results it looks great here.  But so did NOV or similar stories before you have a nasty cycle ahead of you.  Hard to figure out the margin of safety in this kind of situation.

 

And as I mentioned before, I think the Syngenta attempt was a major tell.  There was so much regulatory risk involved that it made no sense to pursue it if the underlying business was that strong.  Something just didn't add up.

 

It might help to call farmers that directly deal with ethanol production.  I bet you could get a lot of useful information to the bull/bear thesis.

[Guest Schwab711]

You give me a lot to think about.

[Guest Schwab711]

Been digging deeper into MON and came to the conclusion that we can't properly value the business on past trends.  It seems like ethanol was a big driver of returns for MON and given the destruction in the oil sector I just can't see how the profit margins will go up to drive further returns.  The past 10-15 years was a once in a lifetime value driver for the company in my opinion.  I couldn't figure out why MON was so bent on acquiring SYT until it occurred to me that they realized the best is behind them and they need to 1) use their expensive stock currency to fund a deal while they could and 2) find aggressive ways to maintain expectations. 

 

I just can't see how they get to $10 of EPS or more in several years.  As Sequoia said, their positions will a financial roadmap all failed and they were likely to avoid them in the future.

 

If Glenview pulls out of the stock, the bottom might fall out.  I'm staying away until I can properly assess the earnings power of the business going forward.  I had bought some shares in the low 100's to track the position and will be selling those shares.

 

I really really wanted you to be wrong. It's embarrassing to say, but I sold my position in MON at a loss a couple weeks ago. I mistakening thought I understood MON better than I did. When I tried modeling $10 EPS by 2019 (their own guidance), I was coming up with some Pollyanna inputs. Thanks for sharing your ideas Picasso.

 

I love MON's seed products but even that division has some concerning trends with ethanol, which does not make economic sense to mandate a mix for much of the country. You also have to worry about some concerning resistance trends and research papers that have shown a large difference between pesticides per food serving with GMOs vs. regular vs. organic (I've always been a GMO supporter [somewhat blindly] but realistically this could end up like asbestos if these sources can compile better evidence). Icing on the cake is pretty much every European and Asian country has banned GMOs.

 

Hopefully MON drops 50% some day and I can reconsider.

 

One is a little old but I found these really useful:

http://www.monsanto.com/investors/documents/2012/final-%20pierre_courduroux_monsanto-%20boaml%2012-07-11-.pdf

http://www.monsanto.com/investors/documents/2015/2015.05.20_bmo-conference-begemann.pdf

 

[feynmanresearch]

One of my contacts has obtained evidence that Monsanto has been slandered by multiple competitors, some publicly traded ones and private ones as well. I attached the link below

https://brandpower.whotrades.com/blog/43071179992

[Chitra]

Hello

 

I am new to this board. I would like to understand the rationale behind Warren Buffet's Monsanto purchase @ ($102.50).

 

I am not sure if it's good buy at $110-112. He loaded 8 Million stocks - I guess he didn't buy for 30% gain (pending Bayer deal).

 

Thoughts?

 

- C

[rogermunibond]

Merger arbitrage.

[rolling]

Hello

 

I am new to this board. I would like to understand the rationale behind Warren Buffet's Monsanto purchase @ ($102.50).

 

I am not sure if it's good buy at $110-112. He loaded 8 Million stocks - I guess he didn't buy for 30% gain (pending Bayer deal).

 

Thoughts?

 

- C

He certainly did (either he or T & T). In a shareholder letter some years back (either in the 80s or 90s) he explains they sometimes do this deals. If I remember correctly only in already agreed deals with more than 20% upside. If there was a >20% upside, in current interest rate environment, with the cash they have on hand and if they believe the deal will close: that is a pretty decent bet... However, the 20% upside isn't there anymore...

[LC]

Monsanto secret documents released since Monsanto did not file any motion seeking continued protection. The reports tell an alarming story of ghostwriting, scientific manipulation, collusion with the EPA, and previously undisclosed information about how the human body absorbs glyphosate.

https://www.baumhedlundlaw.com/toxic-tort-law/monsanto-roundup-lawsuit/monsanto-secret-documents/

[gfp]

With this deal set to close in a couple days, I looked back on Berkshire's arbitrage position in this and see that it got up to just shy of 19 million shares, or $2.428 Billion at the deal close on Jun 7th.  I wonder if this was Warren or an idea of Ted or Todd.  Or, as sometimes occurs, a Ted/Todd idea that gets stolen and made bigger by Warren...

 

Either way, a profitable merger arb with multiple opportunities (that Berkshire appears to have seized on) to add shares at large spreads.  And more cash headed to Omaha

 

 

Hello

 

I am new to this board. I would like to understand the rationale behind Warren Buffet's Monsanto purchase @ ($102.50).

 

I am not sure if it's good buy at $110-112. He loaded 8 Million stocks - I guess he didn't buy for 30% gain (pending Bayer deal).

 

Thoughts?

 

- C

He certainly did (either he or T & T). In a shareholder letter some years back (either in the 80s or 90s) he explains they sometimes do this deals. If I remember correctly only in already agreed deals with more than 20% upside. If there was a >20% upside, in current interest rate environment, with the cash they have on hand and if they believe the deal will close: that is a pretty decent bet... However, the 20% upside isn't there anymore...