Monsanto: Profits grow from seeds

By Elliott Gue

With demand for corn, soybeans and other agricultural commodities continuing to grow and the supply of arable land in decline, farmers need to maximize their harvests. Agribusiness giant Monsanto (MON 0.00%) is one of our favorite food-related plays. Its innovative genetically-modified​ (GM) seeds are critical to producing more crops from less acreage.

GM seeds exhibit advantageous traits. For example, one of Monsanto’s first GM seed products was corn that resisted the company’s Roundup herbicide, enabling farm operators to control weeds without reducing the size of their harvest.

We expect seeds and genomics to drive much of the company’s earnings growth in coming years, with the its innovative corn products (60% of 2012 revenue) leading the way.

SmartStax, Monsanto’s top-selling corn seed, is engineered to resist earworm, fall army worm and other above-ground pests as well as below-ground insects such as rootworm.

SmartStax seeds have several advantages over competitors’ offerings. Because these seeds counteract pests with multiple defense mechanisms, the likelihood that the insect population will develop immunity to these combined traits is much lower.

Management recently projected that its family of GM corn seeds would be sown on about 38 million acres of U.S. farmland — up from 3 million acres in 2010 and 27 million acres in 2012. The growing popularity of these high-margin products should be a boon to the company’s bottom line.

Robust investment in research and development also puts Monsanto ahead of the competition when it comes to innovative crop technologies. The company’s newest GM corn seed, DroughtGard, is the first to exhibit resistance to dry weather.

A limited test in the western Great Plains last year found that seeds with DroughtGard yielded an additional five bushels per acre relative to seeds that lack this trait. Monsanto plans an extensive commercial rollout of DroughtGard during its 2013 fiscal year.

After corn, soybeans account for about 18% of Monsanto’s annual revenue. Monsanto estimates that only 20% of soybean acreage is sown with GM soybeans, creating a significant growth opportunity for the company.

Monsanto also recently inked a deal to license its soybean technology to E.I. du Pont (DD 0.00%) through 2030. We expect this agreement to dramatically expand Monsanto’s footprint in the GM soybean market.

Monsanto’s Intacta RR2 Pro soybeans also performed well in Brazilian trials last year, and the company has high hopes for the commercial rollout of the product.

Meanwhile, Monsanto also has a history of returning capital to shareholders via dividend increases and stock buybacks.

Not only has the agribusiness giant hiked its payout at an average annual rate of 17% over the past five years, but the company also repurchased $300 million worth of shares in the most recent quarter and has another $700 million that could be allocated to this purpose.

Monsanto rates as a “buy” up to $105 per share, though investors should back up the truck if the stock price dips to less than $95.

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