monsanto report

8/10/2019 Monsanto Report

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Recommendation

Hold

Monsanto has been beaten up over the last fewmonths and based on current forecasts and its currentfinancial situation, we feel it is slightly undervaluedand our current investment will recover some of therecent losses.

Recently, Monsanto commercially launched twomajor next-generation products that have significantrevenue growth potential. Our recommendation

reflects Monsanto's leading market positions in corn,soybeans, cotton and vegetable seeds and traits, andits R&D-driven expertise in plant biotechnology thatenables high profit margin and strong cash flows. Thecompany's portfolio benefits from patent protectionfor most of its key products, which creates highbarriers of entry for new market entrants. In addition,Monsanto licenses its technologies and traits to itscompetitors.

Further, their commitment to a significant share

repurchase program leads us to believe they agreewith us on the stocks undervalued nature.

Ticker: MONSector: Basic MaterialsIndustry: Agricultural Chemicals

Recommendation: HOLD

PricingClosing Price $55.79 (9/05/10)52-wk High $87.0652-wk Low $44.61

Market DataMarket Cap $30.15BTrading Vol. 5.92M avgTotal Assets $18.3BTotal Liabilities

ValuationEPS (ttm) $1.83P/E (ttm) $30.49P/S (ttm) $2.94

P/B $2.90Div Yield 2.01%

Profitability & EffectivenessROA (5 yr avg) 8.71%ROE (5 yr avg) 14.48%Oper. Margin 18.87%Profit Margin 13.4%

Analysts: Taylor Fox & Ali Rife


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Company Summary

Monsanto is a multinational agriculture biotechnology corporation. It was founded in1901 when it produced saccharine, a sugar substitute. It currently has 18,800 employeesin over 60 countries. It is currently the largest conventional seed company in the world.

Monsanto is structured in two segments:

Seeds and Traits segment consists of the company's global seeds and traitsbusiness, and genetic technology platforms - including biotechnology, breedingand genomics. This segment produces corn, soybeans, canola, and cotton seeds, aswell as vegetable and fruit seeds, including tomato, pepper, eggplant, melon,cucumber, pumpkin, squash, beans, broccoli, onions, and lettuce. This segmentalso develops biotechnology traits that assist farmers in controlling insects andweeds, as well as provide genetic material and biotechnology traits to other seedcompanies for their seed brands.

Agricultural Productivity segment consists primarily of crop protection products,residential lawn-and-garden herbicide products, and the company's dairy business.

Monsanto has been able to create the worlds largest library of genetics for corn, oilseeds,

cotton, and vegetables.

Monsanto LeadershipMonsanto is lead by CEO Hugh Grant who has been with the company since 1981. Grantwas named one of the world's 30 most respected CEO's on Barron's annual list in Marchof 2009 and in 2010 was named CEO of the year by Chief Executive magazine.Executive pay is based on growth in cash flow, EPS, and sales. Monsanto also requiresexecutives to own a multiple of their base salary in stock.

Industry Profile

The chemicals industry is comprised of companies that produce commodity chemicals,diversified chemicals, fertilizers and agricultural chemicals, industrial gases, andspecialty chemicals. The industry is concentrated in areas where a few largemanufacturers hold significant market share. The larger manufactures benefit fromsupply chain integration and economies of scale, whereas smaller manufacturers utilize


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product specialization and efficient operations in order to compete. The industry iscapital-intensive. In 2009, the industry spent about $24 billion in capital expenditures and$27 billion on research and development. The industry is cyclical and affected by costsfor basic commodities, especially oil and gas. It is the second largest industry in term ofenergy usage, so the prices of those commodities greatly affect this industry. The S&P

Fertilizers & Agricultural Chemicals Index increased 25.0% in 2009, versus a 24.3% risein the S&P 1500 Composite Index. This followed a decrease of 40.1% in the S&PFertilizers & Agricultural Chemicals Index during 2008, versus a 38.2% drop in the S&P1500.

Industry Outlook

Looking ahead, the chemicals industry is expected to soften due to the economiccorrection. However, low crude oil prices may lower production costs and strong demandin emerging economies may offset certain negatives. The industry may see increasedconsolidation due to intense competition, the need for cost efficiencies, and economies of

scale. The U.S. farm economy and crop markets are generally mature, with cultivation ofcorn the largest use for agricultural chemicals. The USDA reported in June 2009 thatfarmers had planted about 87 million acres with corn for the year, up 1% from the prioryear. Much of the growth in global nutrient use has come from developing countries inAsia and Latin America, as these regions' rising populations and income levels boost theneed for grain production. We expect fertilizer and seed companies to continue shiftingfocus to these markets in coming years.

SWOT Analysis

STRENGTHS

Advanced Technology: Monsanto strives to help Farmers get the most out of each acre ofland. In order to accomplish this Monsanto has developed a pipeline on three core pillars:advanced breeding, biotechnology, and improved agronomic practices. When all threecomponents are fully integrated, crop yields have and will continue to increase.Everything they do is aimed at helping to make agriculture more productive and more

profitable for farmers. Monsanto invested more than $980 million last fiscal yearresearching new tools for farmers. The company concentrates the vast majority of itsresearch-and-development (R&D) efforts on new biotech traits, elite germplasm,breeding, new variety and hybrid development, and genomics research. Other R&Dprojects support the companys current products, including improved formulations ofRoundup herbicide. Their importance on R&D sets the tone for Monsanto as whole. Theywill remain the leader in farming technology because of the importance of R&D. They


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set an annual 10% of sales budget for R&D. Monsantos main competitive strategy is tohave the most advanced technology.

Diversification: Monsanto has their two main business segments but each segment is verydiverse. In the Seed and Genomics segment sales are: 66% from corn seed and traits,

19.5% from soybean seed and traits, 2% from cotton seed and traits, 9% from vegetablesseeds, and 3.5% from other crops seeds and traits. Then the Agricultural Productivitysegment sales are: 74% from Roundup and 26% from all other agricultural products.Their biggest diversification is geographically. They have positioned themselves to meetall the needs of North America and continue to have even a greater presence in foreigncountries. Monsanto has been a pillar of excellence abroad for much longer than theircompetitors. They are in a much better position to handle the needs of a growing globaleconomy.

WEAKNESSES

Litigation and Public Outlook: In February 2009, a group of residents from Sauget,Illinois filed a suit against Monsanto and its subsidiaries alleging that for years thecompany dumped toxic and carcinogenic chemicals that poisoned their town. In addition,Monsanto has been identified by the U.S. Environmental Protection Agency as being a"potentially responsible party" for 56 contaminated sites in the United States. Monsantohas been sued, and has settled, multiple times for damaging the health of its employees orresidents near these contaminated sites. Overall, there is a vast list of lawsuits andaccusations about MON. They are criticized by many environmental groups and in manyrural areas have a very poor brand outlook. These litigations and criticisms definitely hurtMONs performance and are an issue they have dealt with for many years.

Financial Liquidity: Currently, the Quick Ratio is 1.36, which shows a lack of ability tocover short-term cash needs. The company's liquidity has decreased from the same periodlast year, indicating deteriorating cash flow. Overall, the key liquidity measurementsindicate that the company is in a position in which financial difficulties could develop inthe future. Inventory growth rates surpassed sales growth rates. This indicates that MONcould experience vast inventory build-up that could lead to liquidity problems. Thepayout ratio for MON is 37.14%, while its historical payout ratio has been 36.40%. Thisindicates that dividends will not rise and if this rising trend continues dividends could becut.

OPPORTUNITIES

Financial Strength: Monsanto has a debt-to-equity ratio that is very low at 0.19 and iscurrently below that of the industry average, implying that there has been very successfulmanagement of debt levels. The gross profit margin for MON is high; currently it is at


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52.00%. MON's long-term growth rate of 11% based on the average of 5-year historicalEPS growth rates. MON has a high ROA of 8.71%, which ensures that there are nostructural flaws in the company. Management has been successful in allocating and usingtheir assets and has created a strong long-term balance sheet. Somehow, they need tocontrol their short-term debt and liquidity problems. If that is done, MON could be very

strong financially and could pay a larger dividend.

Emerging Markets: Monsanto has a supplier diversity pledge: As a global company thatdeals with food, feed and fiber producers in many different countries, cultures andenvironments, Monsanto understands the importance of diversity, and have created aSupplier Diversity Program to help meet the need in this area. This shows that Monsanto

is aware of their opportunities in emerging markets and will be a leader in those markets.India, China and Brazil are showing the most agricultural growth globally. At thebeginning of November, the company opened the Monsanto Biotechnology ResearchCenter in Zhongguancun, China, to strengthen its ties with Chinese research institutionsin plant biotechnology and genomics. The research center will participate in early-stage

bioinformatics and genomics research and serve as a base for collaborating with Chinesescientists. Monsanto also has research centers in the U.S., Brazil and India. As I statedbefore MON is already in place to be a dominant force in these emerging markets andthey will see a significant benefit from that dominance.

Acquisitions to enhance market share: Monsanto acquired a number of companies in2008 and 2009 to enhance its market share. In June 2008, Monsanto acquired De RuiterSeeds Group, a Dutch-holding company that owns and operates De Ruiter Seeds.Monsanto also acquired Marmot, which operates Semillas Cristiani Burkard (SCB), aprivately held seed company headquartered in Guatemala City, Guatemala. SCB is theleading Central American corn Seed Company focused on hybrid corn production. InDecember 2008, Monsanto acquired Aly Participacoes, which operates the sugarcanebreeding and technology companies, CanaVialis and Alellyx. Their location and expertisein Brazil are important, as Brazil is the world's largest producer of sugarcane, the largestexporter of finished sugar, and the world's second-largest producer of ethanol. With theseacquisitions, Monsanto would be able to build a stronger platform to promote thecompany's brand image and further strengthen its market position and customer base.They continue to diversify and expand operations which allow them to eliminate evenmore competition.

New Product Pipeline: Monsanto has a record high of 11 projects currently in their R&Dpipeline. The 4 major projects are as follows. Corn Yield Drought Tolerant, the droughttolerant corn, is in the fourth phase of commercialization. This phase includesdevelopment and testing of best trait and germplasm combinations for commerciallaunch. The company's Genuity SmartStax Corn is also in the fourth phase ofcommercialization. Genuity SmartStax corn is the first, most durable, and highest-yielding package for total weed and bug control in corn. Genuity SmartStax moved intoPhase 4, the final step prior to the product's planned 2010 commercial launch, pendingregulatory approvals. Monsanto's Soy Yield Intrinsic Development, the higher yieldingsoybean, moved into Phase 4. The Roundup Hybridization System for corn would replace


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detasseling in hybrid seed corn production, thus reducing cost of goods. RHS, whichmoved to Phase 3, utilizes a transgenic corn trait created by Monsanto. The hybrid seedgenerated from this technology results in a fully fertile and glyphosate-tolerant plant.Successful commercialization of these products over the next few years would furtherenhance Monsanto's product portfolio and keep them atop the agricultural world in

product advancement and technology.

THREATS

Extensive regulations: Monsanto has come under attack as of late for what some view asanticompetitive behavior. The company's glyphosate-resistant technology hastransformed agriculture, and many competing seed companies cross-license thetechnology because of its widespread acceptance. With Monsantos patented genes beinginserted into roughly 95 percent of all soybeans and 80 percent of all corn grown in theU.S., the company is using its wide reach to control the ability of new biotech firms to get

wide distribution for their products, according to a review of several Monsanto licensingagreements and dozens of interviews with seed industry participants, agriculture and legalexperts. Stringent regulatory and legislative requirements affect the development,manufacture, and distribution of Monsanto's products. Obtaining permits for mining orproduction or testing, planting, and import approvals for seeds or biotechnology traits canbe time-consuming and costly, with no guarantee of success. The failure to receivenecessary permits or approvals could have near-and long-term effects on the company'sability to sell some current and future products. It appears Antitrust investigations will beongoing which will potentially tie up funds for legal assistance. If the investigationscontinue to escalate then MON will see a drastic hit on legal costs.


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Competition

Monsanto's leading market positions in corn, soybean, cotton and vegetables seeds andtraits. The company's portfolio benefits from patent protection for most of its keyproducts, which creates high barriers of entry for new market entrants. In addition,Monsanto licenses its technologies and traits to its competitors. These agreementsgenerate a recurring royalty stream that further supports the company's profitability.

1 Year chart compared to S&P 500 along with Syngenta, a primary competitor.


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Analyst Opinion

Two most recent changes have been downgrades.

Valuation

Based on the current economic climate and Monsantos flattening revenue, we forecastedslow but developing growth over the next 10 years. Further, using 10% as our benchmarkdiscount rate, you can see the sensitivity analysis below the valuation spreadsheet. It isimportant to note, that with the given parameters, the intrinsic value is greater than thecurrent stock price. We feel they have the potential to earn greater than the 1.5%forecasted after the 10 years due to their market leading position and competitiveadvantages but felt this was a safe number to base initial forecasts on.


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Sensitivity Analysis: We chose to alter the second stage growth rates since modifyingthe first stage does not have quite as large of an impact.

Please see excel document for DCF valuation.

Recent News

$1 Billion share buyback over the next three years. However, they intend to finishby year-end 2010.

o However, in the most recent quarter, they issued about the same amount ofdebt as shares they repurchased.

Fitch ratings has rated Monsantos debt as A+

Monsanto sees FY 2010 EPS guides to be on the low end of forecast.

In the quarter ending 5/31/10, numbers are down across the board. Revenue is off25% from the previous quarter and off almost 7% from last years. OperatingExpenses are up due to high COGS resulting in weaker Net income as well.

Significant cash outflows for M&A to pursue the company's growth-through-acquisition strategy, substantial dividends, and a sizeable share repurchaseprogram. Over the past few years, Monsanto completed multiple acquisitions foran aggregated amount of more than $2.8 billion to broaden its product portfoliointo cotton, vegetables, and other seeds and to expand its geographical footprint in

Latin America and other regions outside the United States.Continue to spend a significant amount, around $1 billion each year on capitalexpenditures.


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Financials

Income Statement


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Balance Sheet


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